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Competition and Growth: Reconciling Theory and Evidence
Business & Economics Books
Though competition occupies a prominent place in the history of economicthought, among economists today there is still a limited, and sometimescontradictory, understanding of its impact. In Competition and Growth, PhilippeAghion and Rachel Griffith offer the first serious attempt to provide a unified andcoherent account of the effect competition policy and deregulated entry has oneconomic growth.The book takes the form of a dialogue between an applied theoristcalling on "Schumpeterian growth" models and a microeconometrician employing newtechniques to gauge competition and entry. In each chapter, theoretical models aresystematically confronted with empirical data, which either invalidates the modelsor suggests changes in the modeling strategy. Aghion and Griffith note a fundamentaldivorce between theorists and empiricists who previously worked on these questions.On one hand, existing models in industrial organization or new growth economics allpredict a negative effect of competition on innovation and growth: namely, thatcompetition is bad for growth because it reduces the monopoly rents that rewardsuccessful innovators. On the other hand, common wisdom and recent empirical studiespoint to a positive effect of competition on productivity growth. To reconciletheory and evidence, the authors distinguish between pre- and post-innovation rents, and propose that innovation may be a way to escape competition, an idea that theyconfront with microeconomic data. The book's detailed analysis should aid scholarsand policy makers in understanding how the benefits of tougher competition can beachieved while at the same time mitigating the negative effects competition andimitation may have on some sectors or industries.