Nottingham Centre for Research on
Globalisation and Economic Policy (GEP)

GEP Research Paper 06/09

On the Welfare Effects of Productivity Catch-Up by Laggard Firms

Ben Ferrett

Abstract

The substantial within-industry variation in firm productivity typically observed in the data suggests that there is ample scope for productivity catch-up by laggard firms. We analyse the normative effects of such catch-up. In the short run, where firms' process technologies are fixed, catch-up can reduce social welfare if the initial productivity gap between firms is sufficiently large (the Lahiri/Ono effect). However, in the long run, where firms invest in process R&D to maximize profits, social welfare jumps upwards following catch-up if it causes the major firm's R&D spending lead to grow. Both qualitative insights appear quite general.

Issued in April 2006.

This paper is available in PDF format .

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