Petr Sedlacek, Oxford University

"Up-or-Out Dynamics and Aggregate Growth"

Abstract

Micro-data evidence suggests that firm selection and growth is largely driven by demand-side factors. We build this feature into a model of endogenous firm-level innovation, productivity growth and reallocation. The interaction between demand and productivity growth gives rise to a new economic force: the Firm-Level Market Size (FiLMS) effect. We show analytically that the FiLMS effect can lead to over-investment in R&D. Using aggregated firm-level data to parametrize our model, we show that – contrary to many existing studies - our economy features over-investment in R&D and that its responsiveness to R&D policies vastly differs when demand-side factors are ignored at the firm-level.

Contact person: Søren Hove Ravn