NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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The Causal Effects of Competition on Innovation: Experimental Evidence

Philippe Aghion, Stefan Bechtold, Lea Cassar, Holger Herz

NBER Working Paper No. 19987
Issued in March 2014, Revised in March 2014
NBER Program(s):Productivity, Innovation, and Entrepreneurship

In this paper, we design two laboratory experiments to analyze the causal effects of competition on step-by-step innovation. Innovations result from costly R&D investments and move technology up one step. Competition is inversely measured by the ex post rents for firms that operate at the same technological level, i.e. for neck-and-neck firms. First, we find that increased competition leads to a significant increase in R&D investments by neck-and-neck firms. Second, increased competition decreases R&D investments by firms that are lagging behind, in particular if the time horizon is short. Third, we find that increased competition affects industry composition by reducing the fraction of sectors where firms are neck-and-neck. All these results are consistent with the predictions of step-by-step innovation models.

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Document Object Identifier (DOI): 10.3386/w19987

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