Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/212262
Authors: 
Acemoglu, Daron
Akcigit, Ufuk
Bloom, Nicholas
Kerr, William
Year of Publication: 
2013
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 22/2013
Abstract: 
We build a model of firm-level innovation, productivity growth and reallocation featuring endogenous entry and exit. A key feature 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 detailed US Census micro data on firm-level output, R&D and patenting. The model provides a good t to the dynamics of firm entry and exit, output and R&D, and its implied elasticities are in the ballpark of a range of micro estimates. We find industrial policy subsidizing either the R&D or the continued operation of incumbents reduces growth and welfare. For example, a subsidy to incumbent R&D equivalent to 5% of GDP reduces welfare by about 1.5% because it deters entry of new high-type rms. On the contrary, substantial improvements (of the order of 5% improvement in welfare) are possible if the continued operation of incumbents is taxed while at the same time R&D by incumbents and new entrants is subsidized. This is because of a strong selection effect: R&D resources (skilled labor) are inefficiently used by low-type incumbent firms. Subsidies to incumbents encourage the survival and expansion of these firms at the expense of potential high-type entrants. We show that optimal policy encourages the exit of low-type firms and supports R&D by high-type incumbents and entry.
Subjects: 
entry
growth
industrial policy
innovation
R&D
reallocation
selection
JEL: 
E2
L1
O31
O32
O33
Persistent Identifier of the first edition: 
ISBN: 
978-952-6699-40-0
Document Type: 
Working Paper

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