The Causal Effects of Competition on Innovation: Experimental Evidence

In this paper, we design two laboratory experiments to analyze the causal effects of competition on step-by-step innovation. Innovations result from costly R&D investments and move technology up one step. Competition is inversely measured by the ex post rents for firms that operate at the same technological level, i.e. for neck and neck firms. First, we find that increased competition leads to a significant increase in R&D investments by neck and neck firms. Second, increased competition decreases R&D investments by firms that are lagging behind, in particular if the time horizon is short. Third, we find that increased competition affects industry composition by reducing the fraction of sectors where firms are neck and neck. All these results are consistent with the predictions of step-by-step innovation models. ∗Harvard University, [email protected]. †ETH Zurich, [email protected]. ‡University of Zurich, [email protected]. §University of Zurich, [email protected]. We would like to thank Daniel Chen, Ernst Fehr, Bernhard Ganglmair, Klaus Schmidt, Roberto Weber, as well as the participants at the IMEBE 2013 conference and at the ETH Zurich/Max Planck Workshop on the Law & Economics of Intellectual Property and Competition Law 2013 for their useful comments and feedback.