From one of the world’s leading economists and his coauthors, a cutting-edge analysis of what drives economic growth and a blueprint for prosperity under capitalism.

Crisis seems to follow crisis. Inequality is rising, growth is stagnant, the environment is suffering, and the COVID-19 pandemic has exposed every crack in the system. We hear more and more calls for radical change, even the overthrow of capitalism. But the answer to our problems is not revolution. The answer is to create a better capitalism by understanding and harnessing the power of creative destruction—innovation that disrupts, but that over the past two hundred years has also lifted societies to previously unimagined prosperity.

To explain, Philippe Aghion, Céline Antonin, and Simon Bunel draw on cutting-edge theory and evidence to examine today’s most fundamental economic questions, including the roots of growth and inequality, competition and globalization, the determinants of health and happiness, technological revolutions, secular stagnation, middle-income traps, climate change, and how to recover from economic shocks. They show that we owe our modern standard of living to innovations enabled by free-market capitalism. But we also need state intervention with the appropriate checks and balances to simultaneously foster ongoing economic creativity, manage the social disruption that innovation leaves in its wake, and ensure that yesterday’s superstar innovators don’t pull the ladder up after them to thwart tomorrow’s. A powerful and ambitious reappraisal of the foundations of economic success and a blueprint for change, The Power of Creative Destruction shows that a fair and prosperous future is ultimately ours to make.

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Taxation and small entrepreneurs

This project assesses the effect of successive changes in the French tax system aimed at promoting microbusinesses and small entrepreneurs. Under the leadership of Professor Aghion, Stefanie Stantcheva (Harvard University) and students are developing a new method for calculating the reaction elasticity of economic agents in response to reforms introduced in 1999 and 2008.

Good Rents versus Bad Rents:   R&D Misallocation and Growth 

Antonin Bergeaud

Firm price-cost markups may reflect (a) bigger step sizes from quality innovations that confer significant knowledge spillovers onto other firms, and/or (b) higher process efficiency than competing firms. We write down an endogenous growth model in which, compared with the \emph{laissez-faire} equilibrium, the social planner would generally like to reallocate research resources towards high markup firms in case (a) so as to capitalize on knowledge spillovers but not in case (b). We then exploit unit price variation across firms in French manufacturing to assess the relative strength of these two forces. Viewed through the lens of our model, the French data are consistent with significant variation in innovation step sizes, and hence gains from mitigating R&D misallocation. The policy implication is that, to reach the social optimum, French research subsidies should favor only those  high markup firms with ``good'' rents.   

Lost in Transition : Financial Barriers to Green Growth

Maarten De Ridder 

The share of climate-enhancing innovations in total patents was booming in the years leading up to the Global Financial Crisis, but has ceased to grow since.  We provide causal evidence that tight credit disproportionately affects green innovation, through its effect on young firms.  To explain this, we develop a quantitative framework in which firms direct innovation towards green or polluting technologies, and become better at innovating in technologies that they have previously succeeded in. This means that mature, incumbent firms predominantly innovate in polluting technologies. When green technologies become more attractive, e.g. due to a carbon tax, young firms are responsible for a disproportionate share of the transition to green innovation. As young firms are financially constrained, a credit shock disproportionately harms their innovation,  slowing the green transition. 

Does Chinese Research Hinge on US Co-authors? Evidence from the China Initiative 

Philippe Aghion, Céline Antonin, Luc Paluskiewicz, David Strömberg, Xueping Sun, Raphaël Wargon, Karolina Westin

Launched in November 2018 by the Trump administration, the China Initiative made administrative procedures more complicated and funding less accessible for collaborative projects between Chinese and US researchers. In this paper, we use information from the Scopus database to analyze how the China Initiative shock affected the volume and quality of Chinese research. We find a negative effect of the Initiative on the average quality of both the publications and the co-authors of Chinese researchers with prior US collaborations compared to Chinese researchers with prior European collaborations. Thus, the Initiative is estimated to have reduced the number of yearly citations for Chinese researchers in the treatment group by 13 percent more than for researchers in the control group.  The negative effect of the Initiative has been stronger for Chinese researchers with higher research productivity and/or who worked on US-dominated fields before the shock. Finally, we find no significant effect of the China Initiative on the volume and quality of research of US researchers with prior Chinese collaborations.

Exports and Innovation

This study, carried out with Marc Melitz (Harvard University) and two of Professor Aghion’s students – Antonin Bergeaud and Matthieu Lequien – analyzes the effect of the expansion of export markets on innovation in French exporting companies. It shows in particular that higher export demand gives rise to a market size effect, which leads to increased innovation, especially for firms positioned far from the technological frontier in their respective sectors.

Income Inequality and Dynamics in France

Anaïs Moreau 

The paper examines income inequality and dynamics in France, using exhaustive administrative panel data. We find that the market income distribution is highly unequal, with the top 1% receiving around 6% of the income. Income mobility is characterized by strong persistence at all income levels and for all age groups. We propose a non-parametric framework that accounts for differences in income risk along the market income distribution, revealing significant differences in income growth moments. Our findings indicate that the distribution of growth rates has high variance, excess skewness and is fat-tailed. In particular, we find a U-shaped pattern for income dispersion along the income distribution. We also investigate the role of redistribution as an insurance tool against income risk and find that transfers are particularly pivotal in reducing income risk for the lower part of the income distribution. We show substantial heterogeneity in income risk across locations, education and occupation groups, and the share of capital in total income. Our study provides new insights into the factors driving income inequality and dynamics in France and highlights the importance of the social-fiscal system in mitigating income risk.