An Empirical Model of Growth Through Product Innovation

Productivity differences across firms are large and persistent, but the evidence for worker reallocation as an important source of aggregate productivity growth is mixed. The purpose of this paper is to estimate the structure of an equilibrium model of growth through innovation designed to identify and quantify the role of resource reallocation in the growth process. The model is a version of the Schumpeterian theory of firm evolution and growth developed by Klette and Kortum (2004) extended to allow for firm heterogeneity. The data set is a panel of Danish firms that includes information on value added, employment, and wages. The model's fit is good. The estimated model implies that more productive firms in each cohort grow faster and consequently crowd out less productive firms in steady state. This selection effect accounts for 53% of aggregate growth in the estimated version of the model.