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A trapped factors model of innovation

Bloom, Nicholas and Romer, Paul and Terry, Stephen and Van Reenen, John (2013) A trapped factors model of innovation. CEP Discussion Papers, CEPDP1189. Centre for Economic Performance, London School of Economics and Political Science, London, UK.

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Identification Number: CEPDP1189

Abstract

When will reducing trade barriers against a low wage country cause innovation to increase in high wage regions like the US or EU? We develop a model where factors of production have costs of adjustment and so are partially “trapped” in producing old goods. Trade liberalization with a low wage country reduces the profitability of old goods and so the opportunity cost of innovating falls. Interestingly, the “China shock” is more likely to induce innovation than liberalization with high wage countries. These implications are consistent with a range of recent empirical evidence on the impact of China and offers a new mechanism for positive welfare effects of trade liberalization over and above the standard benefits of specialization and market expansion. Calibrations of our model to the recent experience of the US with China suggests that there will be faster long-run growth through innovation in the US and that, in the short run, this is magnified by the trapped factor effect.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk/_new/publications/series.asp?...
Additional Information: © 2013 The Authors
Subjects: H Social Sciences > HB Economic Theory
JEL classification: F - International Economics > F1 - Trade > F16 - Trade and Labor Market Interactions
J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J33 - Compensation Packages; Payment Methods
O - Economic Development, Technological Change, and Growth > O3 - Technological Change; Research and Development > O33 - Technological Change: Choices and Consequences; Diffusion Processes
O - Economic Development, Technological Change, and Growth > O3 - Technological Change; Research and Development > O38 - Government Policy
Sets: Departments > Economics
Research centres and groups > Centre for Economic Performance (CEP)
Series: Working Papers > CEP Discussion Papers
Date Deposited: 01 Mar 2013 11:32
Last Modified: 01 Mar 2013 11:32
URI: http://eprints.lse.ac.uk/id/eprint/48920

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