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Competition and Innovation: An Inverted-U Relationship*

Philippe Aghion; Nick Bloom; Richard Blundell; Rachel Griffith; Peter Howitt

Massachusetts Institute of Technology

Quarterly Journal of Economics 2005

This paper investigates the relationship between product market competition and innovation. We find strong evidence of an inverted-U relationship using panel data. We develop a model where competition discourages laggard firms from innovating but encourages neck-and-neck firms to innovate. Together with the effect of competition on the equilibrium industry structure, these generate an inverted-U. Two additional predictions of the model-that the average technological distance between leaders and followers increases with competition, and that the inverted-U is steeper when industries are more neck-and-neck-are both supported by the data. © 2005 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

DOI
10.1162/0033553053970214
Volume
120 (2)
Pages
701-728
Language
en
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