Crisis Innovation

84 Pages Posted: 28 Apr 2020 Last revised: 18 Dec 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

Multiple version iconThere are 2 versions of this paper

Date Written: November 2020


The effect of financial crises on innovation 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 document that local distress caused by the Depression led to a sudden and persistent decline in patenting by the largest organizational form of innovation at this time—technological entrepreneurs, who are inventors operating outside firms. 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 first glance. First, there is no observable change in the impact of these patents as measured by the aggregate future citations of these patents, despite the decline in the number of patents filed. Second, the shock is in part absorbed through a reallocation of independent inventors into 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 can be both destructive and creative forces for innovation, and provide the first systematic evidence of the role played by distress from the Great Depression in the long-run organization of innovative activity.

Keywords: Great Depression, Innovation, Financial Crises, Startups, Technological Entrepreneurship

JEL Classification: G01, G21, O3, N12, N22, N32

Suggested Citation

Babina, Tania and Bernstein, Asaf and Mezzanotti, Filippo, Crisis Innovation (November 2020). Available at SSRN: or

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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