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Philippe Aghion, Nick Bloom, Richard Blundell, Rachel Griffith, Peter Howitt, Competition and Innovation: an Inverted-U Relationship, The Quarterly Journal of Economics, Volume 120, Issue 2, May 2005, Pages 701–728, https://doi.org/10.1093/qje/120.2.701
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Abstract
This paper investigates the relationship between product market competition and innovation. We find strong evidence of an inverted-U relationship using panel data. We develop a model where competition discourages laggard firms from innovating but encourages neck-and-neck firms to innovate. Together with the effect of competition on the equilibrium industry structure, these generate an inverted-U. Two additional predictions of the model—that the average technological distance between leaders and followers increases with competition, and that the inverted-U is steeper when industries are more neck-and-neck—are both supported by the data.