Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/176967
Authors: 
Bonfatti, Roberto
Campodonico, Luis A. Bryce
Pisano, Luigi
Year of Publication: 
2018
Series/Report no.: 
CESifo Working Paper 6948
Abstract: 
Empirical studies have uncovered an inverted-U relationship between product-market competition and innovation. This is inconsistent with the original Schumpeterian Model, where greater competition reduces the profitability of innovation. We show that the model can predict the inverted-U if the innovators’ talent is heterogenous, and privately observable. With competition low and profitability high, talented innovators are credit constrained, since others are eager to mimic them. As competition increases, the mimickers become less eager, and talented innovators can invest more. This generates the increasing part of the relationship. With competition high, talented innovators are unconstrained, and the relationship is decreasing.
Subjects: 
innovation
competition
Schumpeterian Model of Growth
asymmetric information
JEL: 
O38
E60
G38
Document Type: 
Working Paper

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