Innovation Policy and the Economy

April 23, 2013
Josh Lerner of Harvard University and Scott Stern of MIT, Organizers

Liran Einav and Jonathan Levin, Stanford University and NBER

The Data Revolution and Economic Analysis

Many believe that "big data" will transform business, government, and other aspects of the economy. Here, Einav and Levin discuss how new data may impact economic policy and economic research. Large scale administrative datasets and proprietary private sector data can greatly improve the way we measure, track, and describe economic activity. They also can enable novel research designs that allow researchers to trace the consequences of different events or policies. The authors discuss some of the challenges in accessing and making use of these data. They also consider whether the big data predictive modeling tools that have emerged in statistics and computer science may prove useful in economics.

Aaron Chatterji, Duke University, and Edward Glaeser and William Kerr, Harvard University and NBER

Clusters of Entrepreneurship and Innovation

Chatterji, Glaeser, and Kerr review recent academic work on the spatial concentration in the United States of entrepreneurship and innovation. They discuss rationales for the agglomeration of these activities and the economic consequences of clusters. They identify and discuss policies that are being pursued in the United States to encourage local entrepreneurship and innovation from both national and local perspectives. While arguments exist for and against policy support of entrepreneurial clusters, their understanding of what works and how it works is quite limited. The best path forward involves extensive experimentation and careful evaluation.

Timothy Simcoe, Boston University and NBER

Industry Standards and Innovation Policy

Shared technology platforms often are governed by standard setting organizations (SSOs), where interested parties seek a consensus solution to problems of technical coordination and platform provision. Economists have modeled SSOs as certification agents, bargaining forums, collective licensing arrangements, and Rand D consortia. Simcoe integrates these diverse perspectives by adapting Elinor Ostrom's framework for analyzing collective self-governance of shared natural resources to the problem of managing shared technology platforms. There is an inherent symmetry between the natural resource commons problem (over-consumption) and the technology platform anti-commons problem (over-exclusion), leading to clear parallels in institutional design. Ostrom's eight principles for governing common pool resources illuminate several common SSO practices, and provide useful guidance for resolving ongoing debates over SSO intellectual property rules and procedures.

Brett Danaher, Wellesley College, and Michael Smith and Rahul Telang, Carnegie-Mellon University

Piracy and Copyright Enforcement Mechanisms

Much debate exists around the impact that illegal file sharing may have on the creative industries. Similarly, opinions differ regarding whether the producers of artistic works should be forced to deal with any weakening of intellectual property rights resulting from illegal file sharing or if governments should intervene to protect these rights. Danaher, Smith, and Telang seek to inform these questions by outlining what we do and do not know from existing research. They first discuss whether file sharing displaces sales of media goods and then discuss whether such displacement will lead to reduced incentives to produce new creative works. They continue by summarizing recent findings on what businesses can do to compete with piracy and the effectiveness of anti-piracy policies on encouraging consumers to migrate from illegal to legal consumption channels. They conclude by demonstrating that without additional empirical evidence, it will be difficult to determine the socially optimal set of strategies and government copyright policies in the digital era.

Ajay Agrawal, University of Toronto and NBER, and Christian Catalini and Avi Goldfarb, University of Toronto

Crowdfunding and Innovation

It is not surprising that the financing of early-stage creative projects and ventures is typically geographically localized because these types of investment decisions usually are predicated on personal relationships and due diligence, which require face-to-face interactions in response to high levels of risk, uncertainty, and information asymmetry. So, to economists, the recent rise of crowdfunding -- raising capital from many people through an online platform –- which offers little opportunity for careful due diligence and involves not only friends and family but also many strangers from near and far, is initially startling. On the eve of launching equity-based crowdfunding, a new market for early-stage finance in the United States, Agrawal, Catalini, and Goldfarb provide a preliminary exploration of its underlying economics. They highlight the extent to which economic theory, in particular transaction costs, reputation, and market design can explain the rise of non-equity crowdfunding, and offer a framework for speculating on how equity-based crowdfunding may unfold. They conclude by articulating open questions related to how crowdfunding may affect social welfare and the rate and direction of innovation.

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