Innovation Policy and the Economy

April 12, 2011
Joshua Lerner of Harvard University and Scott Stern of Northwestern University, Organizers

John Haltiwanger, University of Maryland and NBER
Job Creation and Firm Dynamics in the U.S.

Haltiwanger explores the contribution of business dynamism to U.S. job creation and productivity growth. He shows that the reallocation of jobs, workers, and capital to their best uses is a major factor behind productivity gains over time. Business startups play a critical role in these dynamics: they are an important contributor to job creation, but they are very heterogeneous in terms of productivity. The subsequent "up-or-out dynamic" of young businesses is an important source of job and productivity growth, as the exiting young businesses are of very low productivity while the surviving young businesses exhibit rapid growth with above average productivity. One potential concern is that the United States shows some signs of becoming less dynamic over time - exhibiting a slower pace of reallocation, with an accompanying slower pace of job creation from business startups. The recent recession saw the slowest overall rate of gross job creation, and job creation from startups, since at least 1980. Job creation for small (young) businesses took an especially large hit in the recession and has been very slow to recover. An open question is whether the observed decline in dynamism exhibited by U.S. businesses will have adverse consequences for U.S. innovation, job, and productivity growth in the future.

Lee Fleming, Harvard University, and Matt Marx, MIT
Non-compete Agreements: Barriers to Entry ... and Exit?

Fleming and Marx describe recent research on post-employment covenants not to compete, as well as the potential policy implications of such research. They propose that non-competes are an underappreciated lever for policymakers to wield in effecting entrepreneurial outcomes. They review theory and models, as well as qualitative and quantitative evidence, at three levels of analysis. First, how do non-competes affect individual careers? Second, why do firms adopt non-compete agreements, and how do they affect the behavior and performance of firms? Third, what do we know about the regional implications of non-competes for entrepreneurship, productivity, and other measures? They observe that non-competes are generally favorable for established firms, but less so for firms that are young, small, or not yet established. The benefits to firms appear to be offset by the costs to individual workers, who are often unaware of non-competes when they initially accept an employment offer and end up with reduced opportunities for employment or entrepreneurship going forward. At the regional level, the evidence is thin but again points to the tension between the interests of established firms and firms that do not yet exist. Ultimately, policymakers' decisions regarding whether to enforce non-competes should be driven by the desire to optimize the preservation of established firms versus individual career flexibility, and by the founding and growth of new startups.

Simon Johnson, MIT and NBER
Is Innovation Always Good for the Economy?

The global financial crisis of 2008 demonstrated the perils of unchecked financial innovation. But, Johnson argues, our political establishment has not yet drawn the necessary conclusion from this experience. Inventing the negative-amortization mortgage is not the same thing as inventing the hybrid engine; unless financial innovations overcome recognized, existing barriers to financial intermediation, there is no particular reason to think their benefits outweigh their costs and the risks they create. Only through healthy skepticism toward financial innovation will we be able to protect ourselves from the next financial crisis.

Avi Goldfarb, University of Toronto, and Catherine Tucker, MIT
Privacy and Innovation

Advances in information and communication technology now enable firms to collect detailed and potentially intrusive data about their customers easily and cheaply. This means that privacy concerns are no longer limited to government surveillance and public figures' private lives. The empirical literature on privacy regulation shows that such regulation may affect the extent and direction of data-based innovation. Therefore, Goldfarb and Tucker argue that digitization means that privacy policy is now a part of innovation policy.

Joel Waldfogel, University of Minnesota and NBER
Music Piracy and its Effects on Demand, Supply, and Welfare

The decade since Napster has seen a dramatic reduction in revenue for the recorded music industry. Organizations representing the industry have argued that piracy explains this revenue reduction and that the effective weakening of copyright protection for recorded music will reduce the amount of new music coming to market. Much of the research in this area has sought to document the effect of file sharing on the recording industry's revenue, and most observers agree that since 1999 technological change has sharply reduced the effective degree of protection that copyright affords. But a separate and potentially more important question is: what has happened to the supply of new music in the decade since file-sharing. Waldfogel reports that a new index of the quantity of new music which is derived from critics' best-of lists suggests that the quantity of new, consequential recorded music has not declined since Napster.

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