Competition, market selection and growth

We study the effect of the competitive selection process on the incentive to innovate and the economy’s rate of growth by extending standard quality-ladder models of endogenous growth to allow for the possibility that in each period several asymmetric firms (i.e., an endogenously determined number of past innovators) may be simultaneously active in an industry. Stronger competitive pressure has conflicting effects on the incentive to innovate, lowering prices but also selecting the more efficient firms. We show that the market selection effect of competition always increases the incentive to innovate and find circumstances in which it can outweigh the traditional negative Schumpeterian effect on growth