American Economic Journal: Macroeconomics: Vol. 6 No. 3 (July 2014)

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Competition as a Discovery Procedure: Schumpeter Meets Hayek in a Model of Innovation

Article Citation

Bento, Pedro. 2014. "Competition as a Discovery Procedure: Schumpeter Meets Hayek in a Model of Innovation." American Economic Journal: Macroeconomics, 6(3): 124-52.

DOI: 10.1257/mac.6.3.124

Abstract

I incorporate an insight of Friedrich Hayek—that competition allows a thousand flowers to bloom, and discovers the best among them—into a model of Schumpeterian innovation. Firms face uncertainty about the optimal direction of innovation, so more innovations implies a higher expected value of the "best" innovation. The model accounts for two seemingly contradictory relationships reported in recent empirical studies—a positive relationship between competition and industry-level productivity growth, and an inverted-U relationship between competition and firm-level innovation. Notwithstanding the positive relationship between competition and growth, I find antitrust policy reduces industry-level growth.

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Authors

Bento, Pedro (WV U)

JEL Classifications

B52: Current Heterodox Approaches: Institutional; Evolutionary
D83: Search; Learning; Information and Knowledge; Communication; Belief
G34: Mergers; Acquisitions; Restructuring; Voting; Proxy Contests; Corporate Governance
K21: Antitrust Law
L11: Production, Pricing, and Market Structure; Size Distribution of Firms
L12: Monopoly; Monopolization Strategies
O31: Innovation and Invention: Processes and Incentives

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