American Economic Review Vol. 103 No. 3 2013

A Trapped-Factors Model of Innovation

Nicholas Bloom¹; Paul M. Romer²; Stephen Terry³; John Van Reenen⁴

¹ Stanford University, 579 Serra Mall, Stanford, CA 94305 and National Bureau of Economic Research. · ² New York University Stern School of Business, 44 W Fourth Street, New York, NY 10012. · ³ Stanford University, 579 Serra Mall, Stanford, CA 94305. · ⁴ London School of Economics, Center for Economic Performance, Houghton Street, London WC2A 2AE.

Abstract

We explain a counterintuitive empirical finding: Firms facing more import competition do more innovation. In our model, factors are trapped inside a firm. An increase in import competition encourages a firm to innovate by reducing the opportunity cost of inputs. Without trapped factors, trade liberalization leads to a small permanent increase in the worldwide rate of growth. With trapped factors, firms that face more import competition do relatively more innovation. The extra innovation induced by trapped factors induces a small permanent increase in aggregate output, consumption, and welfare, generalizing the appropriate estimate of the gains from trade.

DOI

10.1257/aer.103.3.208

Volume

103

Issue

3

Pages

208-213

Language

en

Sources

bibtex:phds-export.bib crossref openalex

Cite

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