An Explanation of the Inverted-U Relationship between Profitability and Innovation

KRČÁL, Ondřej. An Explanation of the Inverted-U Relationship between Profitability and Innovation. 1. vyd. Brno: Masaryk University. 160 pp. ISBN 978-80-210-7423-1. doi:10.5817/CZ.MUNI.M210-7423-2014. 2014.

Basic information

• Original name: An Explanation of the Inverted-U Relationship between Profitability and Innovation
• Authors: KRČÁL, Ondřej (203 Czech Republic, guarantor, belonging to the institution).
• Edition: 1. vyd. Brno, 160 pp. 2014.
• Publisher: Masaryk University

Other information

• Original language: English
• Type of outcome: Book on a specialized topic
• Field of Study: 50200 5.2 Economics and Business
• Country of publisher: Czech Republic
• Confidentiality degree: is not subject to a state or trade secret
• Publication form: printed version "print"
• RIV identification code: RIV/00216224:14560/14:00077997
• Organization unit: Faculty of Economics and Administration
• ISBN: 978-80-210-7423-1
• Doi: http://dx.doi.org/10.5817/CZ.MUNI.M210-7423-2014
• Keywords (in Czech): inovace; konkurence; ekonomická efektivnost; modelování; simulace; predikční modely; monografie
• Keywords in English: innovations; competition; economic efficiency; modeling; simulation; predictive models; monograph
• Tags: Munipress
• Tags: International impact, Reviewed

Abstract

In this book I introduce two models of innovation that explain the inverted-U relationship between profitability and innovation, and the findings of Aghion et al. (2005) and Hashmi (2005) related to the relationship between profitability and the dispersion of productivity in the industry. The basic model provides a simple and general explanation of the empirical findings. In the basic model firms choose R&D expenditures that maximize their expected profits under the assumption that R and D expenditures of firms might be constrained by the size of their profits. The prospect-theory model provides a more specific explanation of the empirical findings, which includes a behavioral model of managerial decision-making. Managers in the model choose R and D expenditures according to the preferences represented by the prospect-theory value function. For specific sets of parameter values, both models generate predictions that correspond to the empirical findings of Aghion et al. (2005) and Hashmi (2005). Finally, I show that both models generate realistic predictions for a wider range of parameter combinations around the specific parameter values.

Links

• MUNI/A/0781/2013, interní kód MU: Name: Regulace trhu dopravních služeb – modely, metody a aplikace (Acronym: ReDoS)

Investor: Masaryk University, Category A