Research and projects
Research and projects
This paper presents a growth model where firms can choose between two types of innovation: a risky radical innovation or a safe incremental innovation. In an economy with many different firms all producing goods of different qualities, we find that a free market environment leads to a suboptimal number of radically innovating firms, with only the firms near the back of the quality ladder choosing to engage in it. We find that small firms are disproportionately important for overall growth and that increasing operating costs have a large negative impact on overall innovation.
Through combining the Aghion-Howitt's Schumpeterian growth model and the Mortenson-Pissarides matching model, we closely examine the theoretical implications of labour market frictions on the growth rate. We find that higher-skilled worker bargaining power leads to faster growth as it pushes more skilled workers into growth-enhancing work.