<abstract xmlns="http://www.w3.org/1999/xhtml"><p> This paper introduces a model of innovation that explains some of the stylized facts presented in recent empirical literature. In the model, firms choose R&amp;D expenditures that maximize their expected profits under the assumption that R&amp;D expenditures of firms might be constrained by the size of their profits. Optimal decisions of firms generate relationships between profitability and innovation of individual firms that may create the observed patterns at the industry level. In particular, the model is able to explain an inverted-U relationship between profitability and innovation in the industry together with decreasing or flat and concave relationships between profitability and the dispersion of productivity in the industry. Additionally, the paper investigates the parameter space for which the model generates the observed relationships.</p></abstract>

This paper introduces a model of innovation that explains some of the stylized facts presented in recent empirical literature. In the model, firms choose R&D expenditures that maximize their expected profits under the assumption that R&D expenditures of firms might be constrained by the size of their profits. Optimal decisions of firms generate relationships between profitability and innovation of individual firms that may create the observed patterns at the industry level. In particular, the model is able to explain an inverted-U relationship between profitability and innovation in the industry together with decreasing or flat and concave relationships between profitability and the dispersion of productivity in the industry. Additionally, the paper investigates the parameter space for which the model generates the observed relationships.

The Relationship between Profitability, Innovation and Technology Gap: A Basic Model

Department of Economics, Masaryk University. Address: Lipová 41a, 602 00 Brno

Review of Economic Perspectives

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

This paper introduces a model of innovation that explains some of the stylized facts presented in recent empirical literature. In the model, firms choose R&D...

The Relationship between Profitability, Innovation and Technology Gap: A Basic Model

Published Online: Oct 17, 2014

Page range: 215 - 231

DOI: https://doi.org/10.2478/revecp-2014-0011

Keywords
innovation, technology gap, profits, inverted-U relationship

© by Ondřej Krčál

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

The Relationship between Profitability, Innovation and Technology Gap: A Basic Model

Published Online: Oct 17, 2014

Page range: 215 - 231

DOI: https://doi.org/10.2478/revecp-2014-0011

Keywordsinnovation, technology gap, profits, inverted-U relationship

© by Ondřej Krčál

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Keywords
innovation, technology gap, profits, inverted-U relationship