28
schiantarelli
of trade liberalization could have ambiguous effects on growth, since the positive scale effect is counterbalanced by the (negative) effect generated by the smaller rents that accrue to innovators. Note that, whereas in the product variety models the decentralized growth rate tends to fall short of the one chosen by the social planner, in quality ladder models of creative destruction this may or may not be the case, basically because the benefits of faster technological progress must be traded off against the losses in rents by the monopoly producers that are displaced. Similar ambiguities in terms of welfare implications appear in models in which relationships are characterized by specificity that generates a hold-up problem (Caballero and Hammour 1996, 1998). Regulations that make the reallocation of resources costly can lead to technological sclerosis, in which low-productivity units are allowed to survive too long. At the same time, they may also cause the reallocation process to be unbalanced, in the sense that the destruction rate is excessive, given the low creation rate, and generates too high unemployment of the factor that appropriates part of the rent. In the earlier quality ladder growth models referred to above, innovations were made by outsiders and not by the incumbents. In more recent models (Aghion, Harris, Vickers 1997; Aghion et al. 2001; Aghion et al. 2005; Aghion et al. 2006a; Aghion et al. 2006b; Aghion and Griffith 2005), incumbents are allowed to innovate. In these models, the incentive to innovate depends upon the difference between post- and pre-innovation rents. Greater competition reduces both, but the latter more than the former, fostering innovation. Basically, competition may stimulate innovation because entry and the threat of entry provide an incentive to innovate in order to escape competition. This effect should be stronger in industries where competition occurs between “neck-and-neck� firms, i.e., firms with similar production costs. In other terms, competition is more likely to stimulate innovation and productivity growth in sectors or countries close to the technological frontier, while the opposite holds for sectors or countries below the frontier.9 Finally, there can also be another channel through which increased competition can have a beneficial effect on innovation and growth. When principal agent considerations such as those in Hart (1983) are inserted in an endogenous growth model, greater competitive pressure can provide an incentive for managers to speed up the adoption of new technologies in order to avoid bankruptcy and the loss of benefits from control associated with it (see Aghion, Dewatripont, and Rey 1999). In summary, there are many ways through which product market regulation can have an impact on overall economic performance.