Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/278667 
Year of Publication: 
2023
Series/Report no.: 
ECB Working Paper No. 2835
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
We develop a model to examine how discount rates affect the nature and composition of innovation within an industry. Challenging conventional wisdom, we show that higher discount rates do not discourage firm innovation when accounting for the industry equilibrium. Higher discount rates deter fresh entry-effectively acting as entry barriers-but encourage innovation through the intensive margin, which can lead to a higher industry innovation rate on net. Simultaneously, high discount rates foster explorative over exploitative innovation. The model rationalizes observed patterns of innovation cyclicality, and predicts that lower entry in downturns hedges innovating incumbents against higher discount rates.
Subjects: 
Vertical and horizontal innovation
creative destruction
time-varying discount rates
risk premia
JEL: 
G31
G12
O31
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-6120-2
Document Type: 
Working Paper

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