This paper presents an endogenous growth model that explains the evolution of the first and
second moments of productivity growth at the aggregate and firm level during the post-war period.
Growth is driven by the development of both (i) idiosyncratic R&D innovations and (ii) general
innovations that can be freely adopted by many firms. Firm-level volatility is affected primarily by
the Schumpeterian dynamics associated with the development of R&D innovations. On the other
hand, the variance of aggregate productivity growth is determined mainly by the arrival rate of
general innovations. Ceteris paribus, the share of resources spent on development of general
innovations increases with the stability of the market share of the industry leader. As market shares
become less persistent, the model predicts an endogenous shift in the allocation of resources from
the development of general innovations to the development of R&D innovations. This results in an
increase in R&D, an increase in firm-level volatility, and a decline in aggregate volatility. The effect
on productivity growth is ambiguous.
On the empirical side, this paper documents an upward trend in the instability of market
shares. It shows that firm volatility is positively associated with R&D spending, and that R&D is
negatively associated with the correlation of growth between sectors which leads to a decline in
aggregate volatility.
*Published:
Comin, Diego and Sunil Mulani. "Diverging Trends In Aggregate And Firm Volatility," Review of Economics and Statistics, 2006, v88(2,May), 374-383.
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This paper was revised on November 10, 2006
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