TY - JOUR AU - Aghion,Philippe AU - Bloom,Nicholas AU - Blundell,Richard AU - Griffith,Rachel AU - Howitt,Peter TI - Competition and Innovation: An Inverted U Relationship JF - National Bureau of Economic Research Working Paper Series VL - No. 9269 PY - 2002 Y2 - October 2002 UR - http://www.nber.org/papers/w9269 L1 - http://www.nber.org/papers/w9269.pdf N1 - Author contact info: Philippe Aghion Department of Economics Harvard University 1805 Cambridge St Cambridge, MA 02138 Tel: 617/495-6675 Fax: 617/495-4341 E-Mail: paghion@fas.harvard.edu Nicholas Bloom Stanford University Department of Economics 579 Serra Mall Stanford, CA 94305-6072 Tel: 650/725-3266 Fax: 650/725-5702 E-Mail: nbloom@stanford.edu Richard Blundell University College London Department of Economics Gower Street London, ENGLAND E-Mail: r.blundell@ucl.ac.uk Rachel Griffith IFS 7 Ridgmont Street London WC1E 7AE UK E-Mail: rgriffith@ifs.org.uk Peter Howitt Department of Economics Brown University, Box B Providence, RI 02912 Tel: 401/863-2145 Fax: 401/863-1970 E-Mail: peter_howitt@brown.edu AB - This paper investigates the relationship between product market competition (PMC) and innovation. A growth model is developed in which competition may increase the incremental profit from innovating; on the other hand, competition may also reduce innovation incentives for laggards. There are four key predictions. First, the relationship between product market competition (PMC) and innovation is an inverted U-shape. Second, the equilibrium degree of technological neck-and-neckness' among firms should decrease with PMC. Third, the higher the average degree of neck-and-neckness' in an industry, the steeper the inverted-U relationship. Fourth, firms may innovate more if subject to higher debt-pressure, especially at lower levels of PMC. We confront these predictions with data on UK firms' patenting activity at the US patenting office. They are found to accord well with observed behavior. ER -