Coordination frictions and economic growth

Abstract

AbstractIn practice, firms face a number of scarce innovation projects. They choose one towards which to direct their effort, but do not coordinate these choices. This gives rise to coordination frictions. This paper develops an expanding-variety endogenous growth model to study the implications of these frictions for growth and welfare. We find that the coordination failure generates a number of foregone innovations and reduces the economy-wide research intensity. Both effects decrease the growth rate. This creates a general equilibrium effect that endogenously amplifies the fraction of wasteful simultaneous innovation. Furthermore, formalizing the coordination frictions uncovers a novel link between the “stepping on toes” and “standing on shoulders” externalities—their magnitudes are endogenously determined through the ratio of firms to innovation projects. We find that the “stepping on toes” externality is larger for all parameter values.