Competition, Financial Discipline and Growth

The interaction between domestic competition and economic growth of a country or region is a topic of intense policy debate. For example, in a highly-publicized book, Michael Porter (1990) strongly argues that there exists a positive causal relation between competition and growth, since competition at home forces firms to innovate and to be efficient.1 This "Darwinian" view of competition is supported by recent empirical evidence (e.g. Nickell (1996) or Blundell et al. (1995)) pointing at a positive correlation betweenn competition (measured eithe by the number of competitors in the same industry or by the inverse of a market share or profitability index) and productivity growth within a firm or industry.     

Negotiating free trade

We develop a dynamic bargaining model in which a leading country endogenously decides whether to sequentially negotiate free trade agreements with subsets of countries or engage in simultaneous multilateral bargaining with all countries at once. We show how the structure of coalition externalities shapes the choice between sequential and multilateral bargaining, and we identify circumstances in which the grand coalition is the equilibrium outcome, leading to worldwide free trade. A model of international trade is then used to illustrate equilibrium outcomes and how they depend on the structure of trade and protection. Global free trade is not achieved when the political-economy motive for protection is sufficiently large. Furthermore, the model generates both “building bloc” and “stumbling bloc” effects of preferential trade agreements. In particular, we describe an equilibrium in which global free trade is attained only when preferential trade agreements are permitted to form (a building bloc effect), and an equilibrium in which global free trade is attained only when preferential trade agreements are forbidden (a stumbling bloc effect). The analysis identifies conditions under which each of these outcomes emerges.     

Growth, distance to frontier and composition of human capital

We examine the contribution of human capital to economy-wide technological improvements through the two channels of innovation and imitation. We develop a theoretical model showing that skilled labor has a higher growth-enhancing effect closer to the technological frontier under the reasonable assumption that innovation is a relatively more skill-intensive activity than imitation. Also, we provide evidence in favor of this prediction using a panel dataset covering 19 OECD countries between 1960 and 2000 and explain why previous empirical research had found no positive relationship between initial schooling level and subsequent growth in rich countries.     

Volatility and growth: Credit constraints and the composition of investment

How does uncertainty and credit constraints affect the cyclical composition of investment and thereby volatility and growth? This paper addresses this question within a model where firms engage in two types of investment: a short-term one; and a long-term one, which contributes more to productivity growth. Because it takes longer to complete, long-term investment has a relatively less cyclical return; but it also has a higher liquidity risk. The first effect ensures that the share of long-term investment to total investment is countercyclical when financial markets are perfect; the second implies that this share may turn procyclical when firms face tight credit constraints. A novel propagation mechanism thus emerges: through its effect on the cyclical composition of investment, tighter credit can lead to both higher volatility and lower mean growth. Evidence from a panel of countries provides support for the model's key predictions.     

Competition, entry and the social returns to infrastructure in transition economies

This paper presents a simple model for analysing the contribution of investments in physical and institutional infrastructure to the transition process. In addition to the direct cost savings, infrastructure investment generates important indirect effects, or transition impacts . The model shows that, by reducing transaction costs, infrastructure intensifies product market competition. This leads to more effective weeding out of the existing high-cost firms in the market. In this model, infrastructure also increases the incentives for low-cost firms to restructure which generates additional efficiency gains, but exacerbates the existing cost asymmetry in the economy. Finally, infrastructure investment enhances the incentives for relatively low-cost firms to enter the market, and thus improves the efficiency of the entry process. The importance of these transition impacts of infrastructure is dependent upon features of the economy, such as the degree of cost asymmetry among firms, the proportion of high-cost firms, the cost of restructuring and entry costs for new firms.
JEL classification: L1, O1, P2.     

The observational implications of Schumpeterian growth theory

This paper obtains and discusses alternative testable implications of the Schumpeterian theory of creative destruction for economic growth.     

Competition, Imitation and Growth with Step-by-Step Innovation

Is more intense product market competition and imitation good or bad for growth? This question is addressed in the context of an endogenous growth model with "step-by-step" innovations, in which technological laggards must first catch up with the leading-edge technology before battling for technological leadership in the future. In contrast to earlier Schumpeterian models in which innovations are always made by outsider firms who earn no rents if they fail to innovate and become monopolies if they do innovate, here we find: first, that the usual Schumpeterian effect of more intense product market competition (PMC) is almost always outweighed by the increased incentive for firms to innovate in order to escape competition, so that PMC has a positive effect on growth; second, that a little imitation is almost always growth-enhancing, as it promotes more frequent neck-and-neck competition, but too much imitation is unambiguously growth-reducing. The model thus points to complementary roles for competition (anti-trust) policy and patent policy.