Productivity, Innovation, and Entrepreneurship Meeting

March 15, 2013
Nick Bloom of Stanford University and Josh Lerner of the Harvard Business School, Organizers

Daniel Paravisini, London School of Economics and NBER, and Antoinette Schoar, MIT and NBER

The Information and Agency Effects of Scores: Randomized Evidence from Credit Committees

Information technologies may affect productivity by reducing the processing costs of agents' information, and by making agents' private information easier to observe by the principal. Paravisini and Schoar empirically distinguish these mechanisms in the context of the randomized adoption of credit scoring in a bank that lends primarily to small businesses. They find that scores increase credit committees' effort and output on difficult-to-evaluate applications. Output also increases in a treatment where committees receive no new information about an applicant, but the score is expected to become available in the future. This is uniquely consistent with scores reducing asymmetric information problems inside credit committees. This agency channel explains over 75 percent of the total increase in output . Additional evidence suggests that scores improve productive efficiency by decentralizing decisionmaking in the organization.

Eric Budish, University of Chicago; Benjamin Roin, Harvard Law School; and Heidi Williams, MIT and NBER

Do Fixed Patent Terms Distort Innovation? Evidence from Cancer Clinical Trials

Patents award innovators a fixed period of market exclusivity -- for example, 20 years in the United States. But in many industries, firms file patents at the time of discovery ("invention") rather than of the first sale ("commercialization"), so effective patent terms vary: inventions that commercialize at the time of invention receive a full patent term, but inventions that have a long time lag between discovery and commercialization receive substantially reduced, or in extreme cases zero, effective patent terms. Budish, Roin, and Williams present a simple model formalizing how this variation may inefficiently distort research and development (R&D). They then explore this distortion empirically in the context of cancer R&D, where clinical trials are shorter -- hence effective patent terms are longer -- for drugs targeting late-stage cancer patients relative to drugs targeting early-stage cancer patients, or cancer prevention. Using a newly constructed dataset on cancer clinical trial investments, the authors provide several sources of evidence consistent with fixed patent terms distorting cancer R&D. Back-of-the-envelope calculations suggest that the number of life-years at stake is large. They discuss three specific policy levers that could eliminate this distortion: patent design, targeted R&D subsidies, and surrogate (non-mortality) clinical trial endpoints. They also provide empirical evidence that surrogate endpoints can be effective in practice.

Pierre Azoulay, MIT and NBER; Jeffrey Furman, Boston University and NBER; and Joshua Krieger and Fiona Murray, MIT

Retractions (NBER Working Paper No. 18499)

To what extent does "false science" affect the rate and direction of scientific change? Azoulay, Furman, Krieger, and Murray examine the impact of more than 1,100 scientific retractions on the citation trajectories of articles that are close neighbors of retracted articles in intellectual space but which were published prior to the retraction. They find that, following retraction and relative to carefully selected controls, related articles experience a lasting 5 to 10 percent decline in the rate at which they are cited. They probe the mechanisms that might underlie these negative spillovers over intellectual space. One view holds that adjacent fields atrophy post-retraction because the shoulders they offer to follow-on researchers have been proven to be shaky or absent. An alternative view holds that scientists avoid the "infected" fields lest their own status suffers through mere association. Two pieces of evidence are consistent with the latter view. First, for-profit citers are much less responsive to the retraction event than are academic citers. Second, the penalty suffered by related articles is much more severe when the associated retracted article includes fraud or misconduct, relative to cases where the retraction occurred because of honest mistakes.

Daniel Bradley and Incheol Kim, University of South Florida, and Xuan Tian, Indiana University

Providing Protection or Encouraging Holdup? The Effects of Labor Unions on Innovation

Bradley, Kim, and Tian examine the impact of unionization on the innovation activities of firms. Exploiting a novel database of union election results, they find that patent counts and citations -- proxies for firms' innovativeness -- decline significantly after firms elect to unionize. The opposite is true for firms that vote to de-unionize. To establish causality, the authors use a regression discontinuity design, relying on "locally" exogenous variation in unionization generated by union elections that either pass or do not pass by a small margin of votes. Further, they find that the market reaction to firms that elect to unionize is negatively related to firms' past innovation productivity. The evidence suggests that unionization stifles innovation.

Karthik Krishnan, Northeastern University; Debarshi Nandy, Brandeis University; and Manju Puri, Duke University and NBER

Increased Access to Financing and Firm Productivity

Krishnan, Nandy, and Puri analyze how increased access to financing affects firm productivity. They use a large sample of manufacturing firms from the U.S. Census Bureau' s Longitudinal Research Database (LRD). They exploit a natural experiment following the interstate bank branching deregulation that increased access to bank financing, and they relate this deregulation to firm-level total factor productivity (TFP). The results indicate that firms' productivity increased after their states implemented the bank branching deregulation, and that the increased productivity was long lived. The TFP increases after the bank branching deregulation are greater for financially constrained firms. In particular, firms that are close to but not eligible for financial support from the U.S. Small Business Administration (and thus more financially constrained) have higher TFP increases after the deregulation than firms that just satisfy eligibility criteria (and are hence less financially constrained). These results support the idea that greater access to financing can increase financially constrained firms' access to productive projects (that is, positive NPV projects) which otherwise they may not be able to take up. The results also emphasize that availability of financing is important not only for startup activity (as prior research suggests), but also for increased productivity and the continued success of existing entrepreneurial and small firms.

Sharon Belenzon and Aaron Chatterji, Duke University

Eponymous Entrepreneurs

Many of the most significant challenges for new ventures relate to reducing information asymmetries about the underlying quality of the owner and the firm in order to attract customers, suppliers, and investors. Belenzon and Chatterji explore a highly visible choice that all entrepreneurs must make: selecting a name for their venture. They seek to explain why entrepreneurs would choose to name their firm after themselves (eponymy) and whether empirical patterns in naming are most consistent with theoretical models of signaling or identity. Using data on over 400,000 European firms and 60,000 American firms, they find that eponymy is associated with higher profits and slower growth. The results are particularly pronounced for young firms, for firms that operate in industries where owner-specific skills are more important, and for owners with rare names. They consider several alternative explanations related to family businesses, ethnic names, and name switching. Their analysis suggests that observed patterns in eponymy are most consistent with signaling and that names could contain valuable information about the underlying distribution of owner and firm quality.

Amitabh Chandra, Harvard University and NBER; Amy Finkelstein, MIT and NBER; Adam Sacarny, MIT; and Chad Syverson, University of Chicago and NBER

Healthcare Exceptionalism? Productivity and Allocation in the U.S. Healthcare Sector

In health economics, the conventional wisdom is that large differences in average productivity across hospitals are the result of idiosyncratic, institutional features of the healthcare sector that dull the role of market forces that exist in other sectors. Strikingly, though, productivity dispersion across hospitals, if anything, is smaller than in narrowly defined manufacturing industries, such as concrete. While multiple interpretations of this fact are possible, these researchers also find evidence against the conventional wisdom -- that the healthcare sector does not operate like an industry subject to standard market forces. In particular, they find that more productive hospitals have higher market shares at a point in time and are more likely to expand over time. For example, a 10 percent increase in hospital productivity today is associated with about 4 percent more patients in five years. Taken together, these facts suggest that healthcare may have more in common with "traditional" sectors than is often assumed.

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