This paper analyzes the implications of advertising for firm dynamics and economic growth through its interaction with R&D. We develop a model of endogenous growth with firm heterogeneity that incorporates advertising decisions and calibrate it to match several empirical regularities across firm size. Our model provides micro-foundations for the empirically observed negative relationship between both firm R&D intensity and growth and firm size. In the calibrated model, about half of the deviation from proportional firm growth is attributed to our novel advertising channel. In addition, R&D and advertising are substitutes, a prediction for which we find evidence in the data.
Cavenaile, Laurent, and Pau Roldan-Blanco.
"Advertising, Innovation, and Economic Growth."
American Economic Journal: Macroeconomics,
Firm Behavior: Empirical Analysis
Business Taxes and Subsidies including sales and value-added (VAT)
Firm Performance: Size, Diversification, and Scope
Management of Technological Innovation and R&D