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Competition and innovation: an inverted U relationship

Aghion, P.; Bloom, N.; Blundell, R.; Griffith, R.; Howitt, P.; (2002) Competition and innovation: an inverted U relationship. (NBER Working Papers 9269). National Bureau of Economic Research: Cambridge, US. Green open access

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Abstract

This paper investigates the relationship between product market competition (PMC) and innovation. A growth model is developed in which competition may increase the incremental profit from innovating; on the other hand, competition may also reduce innovation incentives for laggards. There are four key predictions. First, the relationship between product market competition (PMC) and innovation is an inverted U-shape. Second, the equilibrium degree of technological neck-and-neckness' among firms should decrease with PMC. Third, the higher the average degree of neck-and-neckness' in an industry, the steeper the inverted-U relationship. Fourth, firms may innovate more if subject to higher debt-pressure, especially at lower levels of PMC. We confront these predictions with data on UK firms' patenting activity at the US patenting office. They are found to accord well with observed behavior.

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.nber.org/papers/w9269
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/2572/ for the Discussion Papers in Economics version
UCL classification: UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/17786
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