Abstract
Large incumbent firms routinely acquire startups. This may stimulate aggregate growth, as acquisitions provide an incentive for startup creation and could transfer ideas to more efficient users. However, large firms do not always implement the ideas of their acquisition targets. Moreover, frequent acquisitions lower competition, which has an ambiguous effect on the innovation incentives of incumbents. To assess the net effect of these forces, we build a new endogenous growth model with heterogeneous firms and acquisitions. We discipline the model by matching aggregate moments and evidence from a rich micro dataset on acquisitions and patenting. Preliminary findings indicate that stricter antitrust policy would trigger somewhat higher growth.
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