Crisis Innovation

60 Pages Posted: 28 Apr 2020

See all articles by Tania Babina

Tania Babina

Columbia Business School - Finance and Economics

Asaf Bernstein

University of Colorado at Boulder; National Bureau of Economic Research (NBER)

Filippo Mezzanotti

Kellogg School of Management - Department of Finance

Date Written: April 2, 2020

Abstract

The effect of financial crises on innovative activity is an unsettled and important question for economic growth, but one difficult to answer with modern data. Using a differences-in-differences design surrounding the Great Depression, we are able to obtain plausible variation in local shocks to innovative ecosystems and examine the long-run impact of their inventions. We document a sudden and persistent decline in patenting by the largest organizational form of innovation at this time—independent inventors. Parallel trends prior to the shock, evidence of a drop within every major technology class, and consistent results using distress driven by commodity shocks all suggest a causal effect of local distress. Despite this negative effect, our evidence shows that innovation during crises can be more resilient than it may appear at a first glance. First, the average quality of surviving patents rises so much that there is no observable change in the aggregate future citations of these patents, in spite of the decline in the quantity of patents. Second, the shock is in part absorbed through a reallocation of inventors into established firms, which overall were less affected by the shock. Over the long run, firms in more affected areas compensate for the decline in entrepreneurial innovation and produce patents with greater impact. Third, the results reveal no significant brain drain of inventors from the affected areas. Overall, our findings suggest that financial crises are both destructive and creative forces for innovation, and we provide the first systematic evidence of the role that distress from the Great Depression played in the long-run innovative activity and the organization of innovation in the U.S. economy.

Suggested Citation

Babina, Tania and Bernstein, Asaf and Mezzanotti, Filippo, Crisis Innovation (April 2, 2020). Available at SSRN: https://ssrn.com/abstract=3567425 or http://dx.doi.org/10.2139/ssrn.3567425

Tania Babina (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Asaf Bernstein

University of Colorado at Boulder ( email )

Campus Box 419
Boulder, CO 80309
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Filippo Mezzanotti

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

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