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.
"Competition as a Discovery Procedure: Schumpeter Meets Hayek in a Model of Innovation."
American Economic Journal: Macroeconomics,
Current Heterodox Approaches: Institutional; Evolutionary
Search; Learning; Information and Knowledge; Communication; Belief
Mergers; Acquisitions; Restructuring; Voting; Proxy Contests; Corporate Governance
Production, Pricing, and Market Structure; Size Distribution of Firms
Monopoly; Monopolization Strategies
Innovation and Invention: Processes and Incentives