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.