Journal
AMERICAN ECONOMIC REVIEW
Volume 108, Issue 11, Pages 3450-3491Publisher
AMER ECONOMIC ASSOC
DOI: 10.1257/aer.20130470
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Funding
- Harvard Business School
- Innovation Policy and the Economy forum
- National Science Foundation
- University of Pennsylvania
- NSF [ITR-0427889]
- Kauffman Foundation
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We build a model offinn-level innovation, productivity growth, and reallocation featuring endogenous entry and exit. A new and central economic force is the selection between high- and low-type firms, which differ in terms of their innovative capacity. We estimate the parameters of the model using US Census microdata on firm-level output, R&D, and patenting. The model provides a good fit to the dynamics of firm entry and exit, output, and R&D. Taxing the continued operation of incumbents can lead to sizable gains (of the order of 1.4 percent improvement in welfare) by encouraging exit of less productive firms and freeing up skilled labor to be used for R&D by high-type incumbents. Subsidies to the R&D of incumbents do not achieve this objective because they encourage the survival and expansion of low-type firms.
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