The Birth of American Ingenuity:

Innovation and Inventors of the Golden Age

(joint with John Grigsby and Tom Nicholas)

Abstract: We examine the golden age of American innovation by undertaking a major data matching exercise linking US patent records with complete-count data from Federal Censuses between 1880 and 1940. We identify a casual relationship between patented inventions and long run economic growth and outline a basic framework for analyzing key macro and micro-level determinants. We explore drivers of regional performance including population density, openness to disruption and financial development. We then profile the characteristics of inventors, measure the returns to innovation, and document the relationship between social mobility and invention. Our new data help to address important questions related to innovation and long-run growth dynamics.

Growth through Heterogeneous Innovations
[Revised Version]

(joint with William Kerr)
First Version: NBER Working Paper #16443
Revise and Resubmit, Journal of Political Economy

Abstract:  We study how external versus internal innovations promote economic growth through a tractable endogenous growth framework with multiple innovation sizes, multi-product firms, and entry/exit. Firms invest in external R&D to acquire new product lines and in internal R&D to improve their existing product lines. A baseline model derives the theoretical implications of weaker scaling for external R&D versus internal R&D, and the resulting predictions align with observed empirical regularities for innovative firms. Quantifying a generalized model for the recent U.S. economy using matched Census Bureau and patent data, we observe a modest departure for external R&D from perfect scaling frameworks.


Taxation and the International Mobility of Inventors

(joint with Salome Baslandze and Stefanie Stantcheva)
[Presentation Slides]
American Economic Review, forthcoming.
NBER Working Paper #21024
Read more at: The Wall Street Journal, The Telegraph, The Telegraph (Comment), VOX.EU, NBER Digest

Abstract: This paper studies the effect of top tax rates on inventors' mobility across OECD countries since 1977. We put special emphasis on "superstar'' inventors, those with the most and most valuable patents. We use data on inventors from the United States Patent Office to track inventors' locations over time and combine it with international effective top tax rate data. We construct a detailed set of proxies for inventors' counterfactual incomes in each possible destination country including, among others, measures of patent quality and technological fit with each potential destination. We find that superstar top 1% inventors are significantly affected by top taxes rates when deciding on where to locate. The elasticity of domestic inventors to the net-of-tax rate is 0.04, while the elasticity of foreign inventors is 1.3. The elasticities to top net-of-tax rates decline as one moves down the quality distribution of inventors. Inventors who have worked in multinational companies are more likely to take advantage of tax differentials. On the other hand, if the company of an inventor has a higher share of its research activity in a given country, the inventor is less sensitive to the tax rate in that country. We perform extensive robustness checks, including using an alternative dataset based on European Patent Office filings.

Lack of Selection and Limits to Delegation:

Firm Dynamics in Developing Countries

(joint with Harun Alp and Michael Peters)
NBER Working Paper #21905

Abstract: Firm dynamics in poor countries show striking differences to those of rich countries. While few firms indeed experience growth as they age, most firms are simply stagnant in that they neither exit nor expand. We interpret this fact as a lack of selection, whereby producers with little growth potential survive because innovative entrepreneurs do not expand enough to force them out of the market. To explain these differences, we develop a theory whereby firms require managerial inputs for production and countries differ in their managerial delegation possibilities. If delegation of managerial tasks to outside managers is difficult in poor countries, entrepreneurs are forced to rely on their own time to supply managerial services. Improvements in the efficiency of delegation will raise the returns to growing large, induce innovative firms to expand, and thereby force stagnant entrepreneurs out of the market. We prove the existence and uniqueness of the dynamic equilibrium and show analytically how the degree of selection depends on some of the key structural parameters. To discipline the quantitative importance of this mechanism, we calibrate our model to micro data from the US and India. Differences in the efficiency of managerial delegation can explain an important fraction of the differences in plants' life-cycles.


Innovation Network

(joint with Daron Acemoglu and William Kerr)

Proceedings of the National Academy of Sciences, forthcoming.

Abstract: Technological progress builds upon itself, with the expansion of invention in one domain propelling future work in linked fields. Our analysis uses 1.8 million U.S. patents and their citation properties to map the innovation network and its strength. Past innovation network structures are calculated using citation patterns across technology classes during 1975--1994. The interaction of this pre-existing network structure with patent growth in upstream technology fields has strong predictive power on future innovation after 1995. This pattern is consistent with the idea that when there is more past upstream innovation for a particular technology class to build on, then that technology class innovates more.



Creative Destruction and Subjective Wellbeing

(joint with Philippe Aghion, Angus Deaton and Alexandra Roulet)
American Economic Review, forthcoming.
NBER Working Paper #21069

Abstract: In this paper we analyze the relationship between turnover-driven growth and subjective wellbeing. Our model of innovation-led growth and unemployment predicts that: (i) the effect of creative destruction on expected individual welfare should be unambiguously positive if we control for unemployment, less so if we do not; (ii) job creation has a positive and job destruction has a negative impact on wellbeing; (iii) job destruction has a less negative impact in US Metropolitan Statistical Areas (MSA) within states with more generous unemployment insurance policies; (iv) job creation has a more positive effect on individuals that are more forward-looking. The empirical analysis using cross-sectional MSA-level and individual-level data provides empirical support to these predictions.

Transition to Clean Technology

(joint with Daron Acemoglu, Douglas Hanley and William Kerr)
Journal of Political Economy, 2016, 124(1): 52-104.
NBER Working Paper #20743

Abstract: We develop a microeconomic model of endogenous growth where clean and dirty technologies compete in production and innovation -in the sense that research can be directed to either clean or dirty technologies. If dirty technologies are more advanced to start with, the potential transition to clean technology can be difficult both because clean research must climb several steps to catch up with dirty technology and because this gap discourages research effort directed towards clean technologies. Carbon taxes and research subsidies may nonetheless encourage production and innovation in clean technologies, though the transition will typically be slow. We characterize certain general properties of the transition path from dirty to clean technology. We then estimate the model using a combination of regression analysis on the relationship between R&D and patents, and simulated method of moments using microdata on employment, production, R&D, firm growth, entry and exit from the US energy sector. The model's quantitative implications match a range of moments not targeted in the estimation quite well. We then characterize the optimal policy path implied by the model and our estimates. Optimal policy heavily relies on research subsidies as well as carbon taxes. We use the model to evaluate the welfare consequences of a range of alternative policy structures. For example, just relying on carbon taxes or delaying intervention both have significant welfare costs -though their implications for medium run temperature increases are quite different.

Buy, Keep, or Sell: Economic Growth and the Market for Ideas

(joint with Murat Alp Celik and Jeremy Greenwood)
Econometrica, 2016, 84(3): 943-984.
NBER Working Paper #19763
**Supplemental Material 1: Simplified ACG Model
**Supplemental Material 2: Background on the Market for Patents

Abstract:  An endogenous growth model is developed where each period firms invest in researching and developing new ideas. An idea increases a firm's productivity. By how much depends on how central the idea is to a firm's activity. Ideas can be bought and sold on a market for patents. A firm can sell an idea that is not relevant to its business or buy one if it fails to innovate. The developed model is matched up with stylized facts about the market for patents in the U.S. The analysis attempts to gauge how efficiency in the patent market affects growth.

Innovation, Reallocation and Growth

(joint with Daron Acemoglu, Nicholas Bloom and William Kerr)
NBER Working Paper #18993
Revise and Resubmit, American Economic Review

Abstract: We build a model of firm-level innovation, productivity growth and reallocation featuring endogenous entry and exit. A key feature is the selection between high- and low-type firms, which differ in terms of their innovative capacity. We estimate the parameters of the model using detailed US Census micro data on firm-level output, R&D and patenting. The model provides a good fit to the dynamics of firm entry and exit, output and R&D, and its implied elasticities are in the ballpark of a range of micro estimates. We find industrial policy subsidizing either the R&D or the continued operation of incumbents reduces growth and welfare. For example, a subsidy to incumbent R&D equivalent to 5% of GDP reduces welfare by about 1.5% because it deters entry of new high-type firms. On the contrary, substantial improvements (of the order of 5% improvement in welfare) are possible if the continued operation of incumbents is taxed while at the same time R&D by incumbents and new entrants is subsidized. This is because of a strong selection effect: R&D resources (skilled labor) are inefficiently used by low-type incumbent firms. Subsidies to incumbents encourages the survival and expansion of these firms at the expense of potential high-type entrants. We show that optimal policy encourages the exit of low-type firms and supports R&D by high-type incumbents and entry.

Innovation and Top Income Inequality

(joint with Philippe Aghion, Antonin Bergeaud, Richard Blundell, and David Hemous)
NBER Working Paper #21247
Read more at: VOX.EU, US News

Abstract: In this paper we use cross-state panel data to show a positive and signi cant correlation between various measures of innovativeness and top income inequality in the United States over the past decades. Two distinct instrumentation strategies suggest that this correlation (partly) reflects a causality from innovativeness to top income inequality, and the effect is signi cant: for example, when measured by the number of patent per capita, innovativeness accounts on average across US states for around 17% of the total increase in the top 1% income share between 1975 and 2010. Yet, innovation does not appear to increase other measures of inequality which do not focus on top incomes. Next, we show that the positive effects of innovation on the top 1% income share are dampened in states with higher lobbying intensity. Finally, from cross-section regressions performed at the commuting zone (CZ) level, we find that: (i) innovativeness is positively correlated with upward social mobility; (ii) the positive correlation between innovativeness and social mobility, is driven mainly by entrant innovators and less so by incumbent innovators, and it is dampened in states with higher lobbying intensity. Overall, our findings vindicate the Schumpeterian view whereby the rise in top income shares is partly related to innovation-led growth, where innovation itself fosters social mobility at the top through creative destruction.

The Role of Information in Innovation and Competition

(joint with Qingmin Liu)
(Click here for the Online Appendix)
Journal of the European Economic Association, 2016, 14(4): 828-870.

Abstract:  Innovation is typically a trial-and-error process. While some research paths lead to the innovation sought, others result in dead ends. Because firms benefit from their competitors working in the wrong direction, they do not reveal their dead-end findings. Time and resources are wasted on projects that other firms have already found to be fruitless. This is a major problem, particularly in industries that rely heavily on trial-and-error research. We offer a simple model with two firms and two research lines to study this prevalent problem. We characterize the equilibrium in a decentralized environment that necessarily entails significant efficiency losses due to wasteful dead-end replication and a flight to safety -an early abandonment of the risky project. We show that different types of firms follow different innovation strategies and create different kinds of welfare losses. In an extension of the core model, we also study a centralized mechanism whereby firms are incentivized to disclose their actions and share their private information in a timely manner.


Networks and the Macroeconomy: An Empirical Exploration

(joint with Daron Acemoglu and William Kerr)
NBER Macro Annual 2015,
ed. by Martin Eichenbaum and Jonathan Parker, 2016, Vol 30: 276-335.
**NBER Macro Annual Conference 2015 Slides
Read more at: Bloomberg

The propagation of macroeconomic shocks through input-output and geographic networks can be a powerful driver of macroeconomic fluctuations. We first exposit that in the presence of Cobb-Douglas production functions and consumer preferences, there is a specific pattern of economic transmission whereby demand-side shocks propagate upstream (to input supplying industries) and supply-side shocks propagate downstream (to customer industries) and that there is a tight relationship between the direct impact of a shock and the magnitudes of the downstream and the upstream indirect effects. We then investigate the short-run propagation of four different types of industry-level shocks: two demand-side ones (the exogenous component of the variation in industry imports from China and changes in federal spending) and two supply-side ones (TFP shocks and variation in knowledge/ideas coming from foreign patenting). In each case, we find substantial propagation of these shocks through the input-output network, with a pattern broadly consistent with theory. Quantitatively, the network-based propagation is larger than the direct effects of the shocks, sometimes by severalfold. We also show quantitatively large effects from the geographic network, capturing the fact that the local propagation of a shock to an industry will fall more heavily on other industries that tend to collocate with it across local markets. Our results suggest that the transmission of various different types of shocks through economic networks and industry interlinkages could have first-order implications for the macroeconomy.

Back to Basics: Basic Research Spillovers, Innovation Policy and Growth

(joint with Douglas Hanley and Nicolas Serrano-Velarde)
NBER Working Paper #19473

Abstract: This paper introduces a general equilibrium model of endogenous technical change through basic and applied research. Basic research differs from applied research in the nature and the magnitude of the generated spillovers. We propose a novel way of empirically identifying these spillovers and embed them in a framework with private firms and a public research sector. After characterizing the equilibrium, we estimate our model using micro-level data on research expenditures by French firms. Our key finding is that standard R&D policies can accentuate the dynamic misallocation in the economy. We also find a strong complementarity between the strength of property rights of basic research and the optimal funding of public research.

Young, Restless, and Creative:

Openness to Disruption and Creative Innovations

(joint with Daron Acemoglu and Murat Alp Celik)
NBER Working Paper #19894
Revise and Resubmit, Journal of Political Economy

Abstract: This paper argues that openness to new, unconventional and disruptive ideas has a first-order impact on creative innovations -innovations that break new ground in terms of knowledge creation. After presenting a motivating model focusing on the choice between incremental and radical innovation, and on how managers of different ages and human capital are sorted across different types of firms, we provide cross-country, firm-level and patent-level evidence consistent with this pattern. Our measures of creative innovations proxy for innovation quality (average number of citations per patent) and creativity (fraction of superstar innovators, the likelihood of a very high number of citations, and generality of patents). Our main proxy for openness to disruption is manager age. This variable is based on the idea that only companies or societies open to such disruption will allow the young to rise up within the hierarchy. Using this proxy at the firm, patent and country level, we present robust evidence that openness to disruption is associated with more creative innovations.

Patent Value and Citations: Creative Destruction or Strategic Disruption?

(joint with David S. Abrams and Jillian Popadak)
NBER Working Paper #19647

Abstract:  Prior work suggests that more valuable patents are cited more and this view has become standard in the empirical innovation literature. Using an NPE-derived dataset with patent-specific revenues we find that the relationship of citations to value in fact forms an inverted-U, with fewer citations at the high end of value than in the middle. Since the value of patents is concentrated in those at the high end, this is a challenge to both the empirical literature and the intuition behind it. We attempt to explain this relationship with a simple model of innovation, allowing for both productive and strategic patents. We find evidence of greater use of strategic patents where it would be most expected: among corporations, in fields of rapid development, in more recent patents and where divisional and continuation applications are employed. These findings have important implications for our basic understanding of growth, innovation, and intellectual property policy.

What Do We Learn from Schumpeterian Growth Theory?

(joint with Philippe Aghion and Peter Howitt)
NBER Working Paper #18824
in Handbook of Economic Growth, ed. by P. Aghion and S. N. Durlauf, 2014, Vol.2: 515-563.

Abstract: Schumpeterian growth theory has operationalized Schumpeter's notion of creative destruction by developing models based on this concept. These models shed light on several aspects of the growth process that could not be properly addressed by alternative theories. In this survey, we focus on four important aspects, namely: (i) the role of competition and market structure; (ii) firm dynamics; (iii) the relationship between growth and development with the notion of appropriate growth institutions; and (iv) the emergence and impact of long-term technological waves. In each case Schumpeterian growth theory delivers predictions that distinguish it from other growth models and which can be tested using micro data.

Optimal Capital Versus Labor Taxation with Innovation-Led Growth

(joint with Philippe Aghion and Jesus Fernandez-Villaverde)
NBER Working Paper #19086

Abstract: Chamley (1986) and Judd (1985) showed that, in a standard neoclassical growth model with capital accumulation and infinitely lived agents, either taxing or subsidizing capital cannot be optimal in the steady state. In this paper, we introduce innovation-led growth into the Chamley-Judd framework, using a Schumpeterian growth model where productivity-enhancing innovations result from profit-motivated R&D investment. Our main result is that, for a given required trend of public expenditure, a zero tax/subsidy on capital becomes suboptimal. In particular, the higher the level of public expenditure and the income elasticity of labor supply, the less should capital income be subsidized and the more it should be taxed. Not taxing capital implies that labor must be taxed at a higher rate. This in turn has a detrimental effect on labor supply and therefore on the market size for innovation. At the same time, for a given labor supply, taxing capital also reduces innovation incentives, so that for low levels of public expenditure and/or labor supply elasticity it becomes optimal to subsidize capital income.

Intellectual Property Rights Policy, Competition and Innovation

(joint with Daron Acemoglu)
(Note: An earlier version circulated as "State-dependent Intellectual property Rights Policy")
NBER Working Paper #12775
Journal of the European Economic Association, 2012, 10(1): 1-42.
(Click here to download the Online Appendix)

Abstract: To what extent and in what form should the intellectual property rights (IPR) of innovators be protected? Should a company with a large technology lead over its rivals receive the same IPR protection as a company with a more limited advantage? The analysis of these questions necessitates a dynamic framework for the study of the interactions between IPR and competition, in particular to understand the impact of such policies on future incentives. In this paper, we develop such a framework. The economy consists of many industries and firms engaged in cumulative (step-by-step) innovation. IPR policy regulates whether followers in an industry can copy (or license or build upon) the technology of the leader. With full patent protection, followers can catch up to the leader in their industry only by making the same innovation(s) themselves (or by full licensing). We prove the existence of a steady-state equilibrium in a baseline environment and characterize some of its properties. We then quantitatively investigate the implications of different types of IPR policy on the equilibrium growth rate and welfare. The most important result from this exercise is that full patent protection is not optimal (welfare maximizing); instead, optimal policy involves state-dependent IPR protection, providing greater protection to technology leaders that are further ahead than those that are close to their followers. This form of the optimal policy results from the impact of policy on dynamic incentives, in particular from a form of trickle-down effect: providing greater protection to firms that are further ahead of their followers than a certain threshold increases the R&D incentives also for all technology leaders that are less advanced than this threshold.