Productivity, Innovation, and Entrepreneurship

Members of the NBER's Productivity, Innovation, and Entrepreneurship Program met in Cambridge on March 23. Program Co-Directors Nicholas Bloom of Stanford University and Josh Lerner of Harvard University; Faculty Research Fellow Sabrina T. Howell of New York University; and Research Associate Serguey Braguinsky of University of Maryland organized the meeting. These researchers' papers were presented and discussed:

Eunhee Sohn, Georgia Institute of Technology; and Robert Seamans and Daniel Sands, New York University

Technological Opportunity and the Locus of Innovation: Airmail, Aircraft, and Local Capabilities

Sohn, Seamans, and Sands explore how innovation is jointly shaped by exposure to technological opportunities and local capabilities. They exploit a quasi-natural experiment, the establishment of the United States Post Offic's Airmail routes, to analyze how a new technological opportunity spurred innovations in aircraft technology between 1915 and 1935. Using a novel dataset of historical patents, the researchers find that the introduction of an airmail route into a county results in a 93% increase in aircraft-related patents in that county, on average. The researchers also explore the role of local capabilities and find that different types of local knowledge have a heterogeneous effect on patent quality. They find that treated areas with more users and tinkerers produce more low-quality patents, whereas treated areas with more specialists and workers with higher education produce more high-quality patents. Sohn, Seamans, and Sands contribute to existing literature by refining our understanding of how technological opportunities lead to advances in early-stage technologies.

Ernest Liu, Princeton University; Atif R. Mian, Princeton University and NBER; and Amir Sufi, University of Chicago and NBER

Low Interest Rate And Productivity Growth

Liu, Mian, and Sufi build an endogenous growth model to show how low interest rates can increase market power and lower aggregate productivity growth. The model delivers both a traditional expansion in productivity growth in response to lower interest rates, and a slowdown in productivity growth from an increase in market power. When interest rates fall to low levels, the strategic competition effect dominates: the distance between a market leader and a follower increases which reduces investments in productivity by both. The model predicts that very low interest rates lead to an increase in market concentration and mark-ups, a decline in creative destruction and firm entry, a widening productivity-gap between the leader and followers within an industry, and ultimately a decline in productivity growth. The researchers provide empirical evidence in support of these predictions.

Stefano DellaVigna, University of California at Berkeley and NBER, and Matthew Gentzkow, Stanford University and NBER

Uniform Pricing in US Retail Chains (NBER Working Paper No. 23996)

DellaVigna and Gentzkow show that most U.S. food, drugstore, and mass merchandise chains charge nearly-uniform prices across stores, despite wide variation in consumer demographics and the level of competition. Estimating a model of consumer demand reveals substantial within-chain variation in price elasticities and suggests that the average chain sacrifices seven percent of profits relative to a benchmark of flexible prices. In contrast, differences in average prices between chains broadly conform to the predictions of the model. As possible explanations for nearly-uniform pricing, the researchers discuss advertising, tacit collusion, fairness concerns, and managerial fixed costs, and find the most support for the last explanation. They show that the uniform pricing documented significantly increases the prices paid by poorer households relative to the rich, likely dampens the overall response of prices to local economic shocks, and may also shift the incidence of intra-national trade costs.

Patrick M. Kline, University of California at Berkeley and NBER; Neviana Petkova, Department of the Treasury; Heidi L. Williams, MIT and NBER; and Owen M. Zidar, University of Chicago and NBER

Who Profits from Patents? Rent-Sharing at Innovative Firms

Kline, Petkova, Williams, and Zidar analyze how patent-induced shocks to labor productivity propagate into worker compensation using a new linkage of U.S. patent applications to U.S. business and worker tax records. They infer the causal effects of patent allowances by comparing firms whose patent applications were initially allowed to those whose patent applications were initially rejected. To identify patents that are ex-ante valuable, the researchers extrapolate the excess stock return estimates of Kogan et al. (2017) to the full set of accepted and rejected patent applications based on predetermined firm and patent application characteristics. An initial allowance of an ex-ante valuable patent generates substantial increases in firm productivity and worker compensation. By contrast, initial allowances of lower ex-ante value patents yield no detectable effects on firm outcomes. On average, workers capture 29 cents of every dollar of patent-induced operating surplus. This share is larger for men, employees who are listed as inventors, and firm stayers present since the year of application. Patent allowances lead firms to increase employment, but the researchers find minimal evidence of quality upgrading or selection bias in workforce composition. Surprisingly, entry wages are insensitive to patent decisions, suggesting that the large earnings responses of incumbent workers may reflect performance pay.

Barton Hamilton, Washington University in St. Louis; Andres Hincapie, University of North Carolina at Chapel Hill; Robert Miller, Carnegie Mellon University; and Nicholas W. Papageorge, Johns Hopkins University

Innovation and Diffusion of Medical Treatment

Hamilton, Hincapie, Miller, and Papageorge develop and estimate a dynamic structural model of demand for a product line whose characteristics evolve over time as a consequence of consumer choices. They provide a new approach to the econometric challenge of estimating demand under uncertain innovation that includes sporadic breakthroughs and frequent, incremental changes. The researchers use their framework to analyze consumer choice and the realized path of innovations over a long time horizon in a maturing product market: HIV drugs. In the model product quality is multidimensional since medications differ by their efficacy and their propensity to cause side effects. The researchers allow for the possibility that new, more effective medicines can sometimes have harsher side effects. Atomistic consumers do not account for the role of aggregate demand on the speed and direction of innovation, leading to possible externalities. Using their estimated model they find that a planner that internalizes the externalities can increase welfare by at least 2% by increasing experimentation. Their results also indicate that providing monetary incentives for trial participation can be welfare improving.

Sarada Sarada, University of Wisconsin at Madison, and Oana Tocoian, Claremont Mckenna College

Entrepreneurship and the American Dream: How far Does the Upward Mobility Ladder Reach?

Sarada and Tocoian use data from the PSID to present some stylized facts on the co-evolution of entrepreneurship, household wealth formation and intergenerational mobility in the U.S., between 1968 and 2013. They find that the vast majority of poor households participate solely in wage work, while almost 60 percent of the top 1% are involved in entrepreneurship - defined as either long term self-employment, incorporated business ownership, or un-incorporated business ownership. Households engaged in entrepreneurship experience substantial wealth gains over their observationally equivalent counterparts, regardless of where in the wealth distribution they came from. Specifically, those who own and work for their own incorporated business during young adulthood achieve an advantage of 13 wealth percentiles by middle age when compared to a similar wage employee, and 10 centiles when compared to a similar (but non- entrepreneurial) sibling. Note that this finding derives even when the researchers control for parental status, in effect reflecting not just inherited wealth, but also financial gains from ones own accomplishments. While those who survive in entrepreneurship experience sizable wealth gains, access to this avenue is far from uniform. Those born in the top wealth decile are 4 times more likely to own an incorporated business during young adulthood, as compared to those whose parents had below-median wealth. The net effect is that successful entrepreneurial households are even less likely to come from humble-to-moderate beginnings than successful non-entrepreneurial households. Less lucrative forms of entrepreneurship, namely short term self-employment and unincorporated business ownership, do not suffer from the same access barriers but also confer much lower gains. This highlights the distinction in how financing constraints might vary by entrepreneurial tier and suggests that the researchers focus not just on the entry (extensive) margin, but also on the survival, growth and incorporation (intensive) margins.
The observed access hurdles suggest analyzing what factors – beyond parental wealth – predict participation and financial success in entrepreneurship. The only consistent predictor throughout is parental experience in entrepreneurship. Education and IQ do correspond to entrepreneurial success, but are far smaller in magnitude than parental resources and appear to enter as a complement to parental financial capital, rather than substitute for it. Sarada and Tocoian conclude that entrepreneurship has increased absolute mobility, but has done little if anything to enable more movement along the social ladder. It in some ways embodies the American Dream, but only for the exceptional, lucky, or wealthy few who do gain access. The researchers show that any discussion on the inequality of opportunity in modern societies must take into account entrepreneurship.

Jeffrey L. Furman, Boston University and NBER, and Markus Nagler and Martin Watzinger, University of Munich

Disclosure and Subsequent Innovation: Evidence from the Patent Depository Library Program

How important is information disclosure through patents for innovation? To investigate this question, Furman, Nagler, and Watzinger examine the expansion of the USPTO Patent and Trademark Depository Library system from 1977 to 1997. While the exclusion rights associated with patents are national in scope, the opening of these patent libraries in a period before the internet yielded regional variation in the costs to access the technical information (prior art) disclosed in patent documents. Whereas the location of patent libraries prior to 1977 had been chosen by the USPTO, the timing and location of library opening in the 1977-1997 period was more random, as they were typically granted to the first qualified library in a state to request them. The researchers find that after a patent library opens in a particular region, local patenting increases by 19% relative to control regions that have Federal Deposit Libraries but do not yet operate patent libraries. The facts that the response to patent libraries is greatest among young companies, that library opening induces local inventors to cite more geographically distant and more technologically diverse prior art, and that average patent citations received are not reduced by library opening, are consistent with the prospect that information disclosed in the patent documents is driving the paper's core findings. In additional analyses, the researchers find that library opening is associated with an increase in local business formation and job creation. Taken together, their analyses provide evidence that the information disclosed in patent prior art plays an important role in supporting innovation. For managers, these results suggest that innovation supporting information spillovers are not only available through agglomeration, but may also be achieved by locating close to knowledge-enhancing institutions, such as patent libraries.

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