BTI · Break-Through Innovation - R D Misallocation, Green Innovation, and the AI Revolution

This research project will confront theory and data to analyze the underpinnings and the effects of breakthrough innovation. We explore three main questions.First question: How should we design R&D policy to induce breakthrough innovation? Why do we observe more incremental innovations in Europe than in the US? We shall address this question using an extension of the Schumpeterian growth paradigm where both the size and sources of markups differ across firms. Firms may be big as a result of breakthrough innovation, or for other reasons, including the lack of competition. In this part of the project, we shall provide new tools to empirically distinguish between these different sources of rents, with implications for the optimal design of R&D policy and competition (e.g. M&A) policy. Second question: How can we further stimulate radical green innovation to help solve climate change? It has been shown in previous work that firms whose innovation has focused on polluting technologies in the past prefer to innovate in polluting technologies in the future. Here we will extend the literature on green innovation in three directions: first, by analyzing green technological transition along a supply chain, second by looking at the relationship between green innovation and credit access, and third, by looking at the implications for the green transition process, of consumers’ non-homothetic preferences for quality goods that are more reliant on service labor, and therefore exhibit a comparatively lower environmental footprint.Third question: What are the growth and employment effects of the AI revolution, and which policies – if any – can maximize the growth and employment potential of AI? Our analysis will rely on an extended growth model where AI can automate tasks both, in the production of goods and services and in the production of ideas.