A Trapped-Factors Model of Innovation
- (pp. 208-13)
AbstractWe 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.
Citation2013. "A Trapped-Factors Model of Innovation." American Economic Review, 103(3): 208-13. DOI: 10.1257/aer.103.3.208
- D21 Firm Behavior: Theory
- F14 Empirical Studies of Trade
- L21 Business Objectives of the Firm
- O31 Innovation and Invention: Processes and Incentives