Abstract
I incorporate an insight of Friedrich Hayek—that competition allows a thousand flowers to bloom, and discovers the best among them—into a model of Schumpeterian innovation. Firms face uncertainty about the optimal direction of innovation, so more innovations implies a higher expected value of the “best” innovation. The model accounts for two seemingly contradictory relationships reported in recent empirical studies—a positive relationship between competition and industry-level productivity growth, and an inverted-U relationship between competition and firm-level innovation. Notwithstanding the positive relationship between competition and growth, I find antitrust policy reduces industry-level growth. (JEL B52, D83, G34, K21, L11, L12, O31)
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