Aghion, P.;
Bloom, N.;
Blundell, R.;
Griffith, R.;
Howitt, P.;
(2004)
Competition and innovation: an inverted U relationship?
(Discussion Papers in Economics
04-06).
Department of Economics, University College London: London, UK.
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Abstract
This paper investigates the relationship between product market competition and innovation. It uses the radical policy reforms in the UK as instruments for changes in product market competition, and finds a robust inverted-U relationship between competition and patenting. It then develops an endogenous growth model with step-by-step innovation that can deliver this inverted-U pattern. In this model, competition has an ambiguous effect on innovation. On the one hand, it discourages laggard firms from innovating, as it reduces their rents from catching up with the leaders in the same industry. On the other hand, it encourages neck-and-neck firms to innovate in order to escape competition with their rival. The inverted-U pattern results from the interplay between these two effects, together with the effect of competition on the equilibrium industry structure. The model generates two additional predictions: on the relationship between competition and the average technological distance between leaders and followers across industries; and on the relationship between the distance of an industry to its technological frontier and the steepness of the inverted-U. Both predictions are supported by the data.
| Type: | Working / discussion paper |
|---|---|
| Title: | Competition and innovation: an inverted U relationship? |
| Open access status: | An open access version is available from UCL Discovery |
| Publisher version: | http://www.ucl.ac.uk/silva/economics/research/pape... |
| Language: | English |
| Additional information: | Please see http://eprints.ucl.ac.uk/2962/ for the IFS Working Paper version, and see http://eprints.ucl.ac.uk/17786/ for the NBER Working Paper version |
| URI: | https://discovery.ucl.ac.uk/id/eprint/2572 |
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