American Economic Review: Vol. 103 No. 3 (May 2013)


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A Trapped-Factors Model of Innovation

Article Citation

Bloom, Nicholas, Paul M. Romer, Stephen J. Terry, and John Van Reenen. 2013. "A Trapped-Factors Model of Innovation." American Economic Review, 103(3): 208-13.

DOI: 10.1257/aer.103.3.208


We explain a counterintuitive empirical finding: Firms facing more import competition do more innovation. In our model, factors are trapped inside a firm. An increase in import competition encourages a firm to innovate by reducing the opportunity cost of inputs. Without trapped factors, trade liberalization leads to a small permanent increase in the worldwide rate of growth. With trapped factors, firms that face more import competition do relatively more innovation. The extra innovation induced by trapped factors induces a small permanent increase in aggregate output, consumption, and welfare, generalizing the appropriate estimate of the gains from trade.

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Bloom, Nicholas (Stanford U)
Romer, Paul M. (NYU)
Terry, Stephen J. (Stanford U)
Van Reenen, John (CEP, London School of Economics and Political Science)

JEL Classifications

D21: Firm Behavior: Theory
F14: Empirical Studies of Trade
L21: Business Objectives of the Firm
O31: Innovation and Invention: Processes and Incentives

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