The Innovation-Complexity Trade-off: How Bottlenecks Create Superstars and Constrain Growth

We introduce a model of technological advances as allowing for greater productivity at the cost of increased complexity. Complex goods and services, like Swiss watches, require a large number of strongly complementary inputs which themselves must be precisely calibrated. Increasing complexity increases the probability that an input will be flawed, leading to a skewed distribution of firms sizes, with more extreme superstars and a higher share of mediocre firms.

Whether additional combinatoric innovation increases growth is determined by a trade-off between its contribution to productivity and the additional complexity it entails. We evaluate alternative strategies to deal with complexity, including modularization, and show that in equilibrium they are just as important for boosting long term growth as increasing innovation.