Innovation and Industry Growth: Non-Creative Destruction Versus Welfare Maximisation

We analyse the impact of ownership, market structure, and quality of governance on sustainable industry growth as driven by process innovations generated by salaried agents under asymmetric information. The agent faces uncertainty because of performance-related pay and random punishments, which can be imposed by the employer (as arguably in the case of Nokia’s demise as a producer of mobile phones) or by external forces. Intermediate concentration yields the highest growth when firms maximise profits, but innovation costs increase with the market size. This can lead to monopolisation, and hence to non-creative destruction. A welfare-maximising public monopoly outperforms the oligopoly, but not necessarily under bad governance. An oligopoly can reach reasonable growth, but only under stringent conditions if the discount factor is high. Public ownership might then be an attractive alternative, but interventions to improve governance and to ensure decent working conditions, job security, and long-termism may then be necessary. (#149)