Innovation, Reallocation, and Growth
By D. Acemoglu, U. Akcigit, H. Alp, N. Bloom, W. Kerr
This model (.PDF) enables an examination of the forces jointly driving innovation, productivity growth & reallocation and investigates the implications of several types of industrial policies on longrun growth and welfare.
Key concepts include:
- The general equilibrium model, incorporating both reallocation and selection effects, highlights the potential pitfalls of industrial policies supporting incumbents, particularly large incumbents.
- Industrial policies (subsidies to incumbent R&D or to their operating costs) reduce growth and welfare, while entry subsidies have a positive but very small effect.
- Optimal policy, which can have substantial innovation and growth gains, simultaneously encourages the exit of under-performing incumbent firms and supports R&D by high-type incumbents and new entrants.
