This paper argues that incentives for innovation change nonlinearly by market structure. Using data from 3-digit NAICS and USPCS in the United States, I find strong evidence of a sinusoidal-shaped relationship by using the sub-sectional robust OLS regression model and the quadratic fitting curve. The results imply that the market structures of strong oligopoly and near perfect competition are optimal in stimulating firms to innovate. Moreover, I find a positive relationship between innovation and sales revenue, and between innovation and the number of establishments through robust OLS regression model, which is consistent with the literature. The key theoretical assumption is that profit after innovation serves as an incentive mechanism, which is supported by the regression model. I re-exam Schumpeter and Arrow’s hypotheses, arguing that rather than conflicting they are both consistent along different stretches of competition.
Shi, Qitian, "Competition and Innovation: a Sinusoidal-shaped Relationship Driven by Post-incremental Profit" (2019). Senior Independent Study Theses. Paper 8497.
Economic Theory | Industrial Organization
Industrial Organization, Market Structure, Innovation, Concentration, Competition
Bachelor of Arts
Senior Independent Study Thesis
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