Rationalizing Scherer’s prophecy of an inverted-U relationship between competition and innovation

Author/s Philippe Aghion
Publishing Year 2014 Issue 2014/1
Language Italian Pages 11 P. 13-23 File size 78 KB
DOI 10.3280/POLI2014-001002
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In this paper we develop a simple Schumpeterian growth model to rationalize the inverted-U relationship between competition and innovation uncovered by Scherer (1967). This model in turn delivers a number of testable prediction. A first testable prediction is that the relationship between competition and innovation follows an inverted- U pattern and the average technological gap within a sector increases with competition. A second prediction is that more intense competition enhances innovation in "frontier" firms but may discourage it in "non-frontier" firms. A third prediction is that there is complementarity between patent protection and product market competition in fostering innovation. More generally, recent attempts at verifying Scherer’s conjectures have given rise to a whole new trend of endogenous growth models aimed at being confronted with micro evidence.

Keywords: Creative destruction, competition, innovation, composition effect, technology frontier, leader, laggard

Jel codes: O10, O11, O12, O30, O31, O33, O40

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Philippe Aghion, Rationalizing Scherer’s prophecy of an inverted-U relationship between competition and innovation in "ECONOMIA E POLITICA INDUSTRIALE " 1/2014, pp 13-23, DOI: 10.3280/POLI2014-001002