Journal article

Competition and innovation: An inverted U relationship

Aghion P, Bloom N, Blundell R, Griffith R, Howitt P ...see all

The Quarterly Journal of Economics, vol. 120, issue 5 (2005) pp. 701-728

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Abstract

This paper investigates the relationship between product market competition and innovation. We find strong evidence of an inverted-U relationship using panel data. We develop a model where competition discourages laggard firms from innovating but encourages neck-and-neck firms to innovate. Together with the effect of competition on the equilibrium industry structure, these generate an inverted-U. Two additional predictions of the model—that the average technologi- cal distance between leaders and followers increases with competition, and that the inverted-U is steeper when industries are more neck-and-neck—are both supported by the data.

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Authors

  • P Aghion

  • N Bloom

  • R Blundell

  • R Griffith

  • P Howitt

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