An Inverted-U Relationship between Product Market Competition and Growth in an Extended Romerian Model

The influence of product market competition on growth is re-considered by developing an extension of the basic Romerian model of horizontal innovation. We find that the relationship between competition and growth is inverse-U shaped, provided that the non-accumulable factor input is employed in each sector. We explain this result by the interplay between two effects. For low values of competition, the positive resource allocation effect outweighs the negative profit incentive effect. When product market competition is intense, the resource allocation and profit incentive effects are both negative and reinforce each other in inducing a negative correlation between competition and growth.