Does competition spur innovation? The case of yardstick competition

- This paper investigates the effect of yardstick competition on cost-reducing innovations.
- We provide a natural measure for the intensity of yardstick competition.
- An increase in the intensity of yardstick competition increases the incentives to innovate.

This paper investigates the effect of yardstick competition on firms' incentives to invest in cost-reducing innovations. We show that an increase in the intensity of yardstick competition, for which we provide a natural measure, increases the incentives to innovate.