Disruptive Innovation and Growth: The Role of Information

We analyze the role of information in a dynamic Schumpeterian model of creative destruction, in which economic growth is driven by entrepreneurs' innovation effort. Upon successful innovation, an entrepreneur displaces an incumbent to earn monopolistic profits, until displaced by future successful entrepreneurs. Access to decision-useful information about future profit-relevant shocks allows entrepreneurs to align their effort by intensifying innovation in periods with higher profit-potential. The increase in innovation efficiency of entrepreneurs improves long-term growth when the information is about long-term shocks but not when the shocks are short-lived. At the same time, expecting more efficient innovation of future information-aided entrepreneurs amplifies the displacement threat to current entrepreneurs, discourages their incentive to innovate, and thereby lowers economic growth. This displacement-threat effect serves as an opposing force to the effort-alignment effect and is present for both long-term and short-term information. On balance, only long-term information can lead to higher economic growth for the society despite dampening disruption frequency, while short-term information always hinders both frequency and growth. In the welfare analysis, we show that growth may fall short of or exceed the socially optimal level, and that information provision can be used as a tool to manage growth.