D.T.: An empirical model of growth through product innovation

Productivity dierences across rms are large and persistent but the evidence for worker reallocation as an important source of aggregate productivity growth is mixed. The purpose of the 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 rm evolution and growth developed by Klette and Kortum (2004) extended to allow for rm heterogeneity. The data set is a panel of Danish rms that includes information on value added, employment, and wages. The model's t is good. We show that the empirical growth decomposition identity popularized by Baily, Hulten, and Campbell (1992) does not identify the contribution of resource reallocation to growth in a steady state stochastic growth model such as ours. However, the theory implies that more productive rms in each cohort grow faster and consequently crowd out less productive rms in steady state. This selection eect accounts for 55 % of aggregate growth in the estimated version of the model