Advertising, Innovation, and Economic Growth
- American Economic Journal: Macroeconomics (Forthcoming)
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
microfoundations 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.
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