Research Interests: Macroeconomics, Economic Growth, Firm Dynamics, Innovation, Entrepreneurship.



The Rise of American Ingenuity: Innovation and Inventors of the Golden Age

(w/ John Grigsby and Tom Nicholas)

NBER Working Paper # 23047.

Read more at: Harvard Business Review, VoxEU

Abstract: We examine the golden age of U.S. innovation by undertaking a major data collection exercise linking inventors from historical U.S. patents to Federal Censuses between 1880 and 1940, and to state and county-level aggregates. We provide a framework for analyzing key macro and micro-level determinants of innovation. We identify a strong relationship between patented inventions and long-run economic growth, and use an instrumental variables approach exploiting an historical shift in innovation activity during World War II to show that this relationship could be causal. We find that patenting activity is positively related to commonly postulated drivers of regional performance including population density, financial development and geographic connectedness. We also explore the correlation between innovation and social structure, as measured by slavery and religion. We then profile the characteristics of inventors and their life cycle, and find that inventors were highly educated, positively selected through exit early in their careers, delayed marriage, and tended to migrate to places that were conducive to innovation. Father's income and education were positively correlated with becoming an inventor, though not when controlling for the child's education. There were strong financial returns to technological development. Finally, we document a U-shaped relationship between top income inequality and innovation, yet innovative places tended to be more socially mobile. Our new data help to address important questions related to innovation and long-run growth dynamics.

Immigration and the Rise of American Ingenuity

(w/ John Grigsby and Tom Nicholas)

American Economic Review, Papers and Proceedings, 2017, 107(5): 327-331.

Read more at: The Atlantic, Harvard Business Review, VoxEU, NBER Digest, Les Echos

Abstract: We build on the analysis in Akcigit, Grigsby, Nicholas (2017) by using US patent and Census data to examine the relationship between immigration and innovation. We construct a measure of foreign born expertise and show that technology areas where immigrant inventors were prevalent between 1880 and 1940 experienced more patenting and citations between 1940 and 2000. The contribution of immigrant inventors to US innovation was substantial. We also show that immigrant inventors were more productive than native born inventors; however they received significantly lower levels of labor income. The immigrant inventor wage-gap cannot be explained by differentials in productivity.

Optimal Taxation and R&D Policies

(w/ Douglas Hanley and Stefanie Stantcheva)

NBER Working Paper # 22908.

Abstract: We study the optimal design of R&D policies and corporate taxation. There are two distortions in the private market related to innovation: technology spillovers across firms and the non appropriability of innovations, which lead to monopoly distortions induced by the patent system. The government would like to correct for these market failures through innovation policies. However, firms are heterogeneous in their research productivity, i.e., in their efficiency in using a given set of R&D inputs to produce successful innovations. This productivity is private information of the firm, leading to the fundamental asymmetric information problem at the core of this paper that prevents the first best solution to the technology spillover and monopoly distortion. The problem is posed as a dynamic mechanism design with externalities. We characterize the optimal constrained efficient allocations over firms' life cycles and across different types of firms. We show that the constrained efficient allocations can be implemented either by a price subsidy on the monopolists' products, together with a parsimonious corporate income tax function or, equivalently, by a prize mechanism. We estimate our model using firm-level data matched to patent data and quantify the optimal policies. Simpler innovation policies, such as linear R&D subsidies and linear profit taxes, lead to large revenue losses relative to the optimal mechanism.

Back to Basics: Basic Research Spillovers, Innovation Policy and Growth

(w/ Douglas Hanley and Nicolas Serrano-Velarde)

CEPR Discussion Paper #11707

Abstract: This paper introduces a general equilibrium model of endogenous technical change through basic and applied research. Basic research differs from applied research in the nature and the magnitude of the generated spillovers. We propose a novel way of empirically identifying these spillovers and embed them in a framework with private firms and a public research sector. After characterizing the equilibrium, we estimate our model using micro-level data on research expenditures by French firms. Our key finding is that standard innovation policies (e.g., uniform R&D tax credits) can accentuate the dynamic misallocation in the economy by oversubsidizing applied research. Policies geared towards public basic research and its transmission to the private sector are significantly welfare improving.

Lack of Selection and Limits to Delegation: Firm Dynamics in Developing Countries

(w/ Harun Alp and Michael Peters)

NBER Working Paper #21905

Abstract: Firm dynamics in developing countries show striking differences to those in developed countries. While some firms do grow as they age, most firms are simply stagnant and do not exit despite being small. We ask to what extent these patterns could be driven by cross-country differences in the efficiency of managerial delegation. If delegating managerial tasks is difficult in poor countries, entrepreneurs with growth potential might decide to remain small, as they have to rely on their own scarce time to run their daily operations. This in turn reduces competition, slows down firm selection through creative destruction, and hence keeps subsistence firms with little growth potential in the market. To quantify the importance of this mechanism, we construct a model of firm growth and calibrate it to firm-level data from the U.S. and India. Three results emerge: (i) The Indian economy suffers from a lack of selection, whereby a low rate of creative destruction allows subsistence producers to survive. (ii) The high delegation efficiency in the U.S. is an important determinant of why U.S. firms are large. (iii) While managerial delegation is inefficient in India, its effect on the lifecycle of Indian firms is limited due to important complementarities between the delegation efficiency and other factors affecting firm growth.

Growth through Heterogeneous Innovations

(w/ William Kerr)

Journal of Political Economy, forthcoming.

Abstract:  We study how external versus internal innovations promote economic growth through a tractable endogenous growth framework with multiple innovation sizes, multi-product firms, and entry/exit. Firms invest in external R&D to acquire new product lines and in internal R&D to improve their existing product lines. A baseline model derives the theoretical implications of weaker scaling for external R&D versus internal R&D, and the resulting predictions align with observed empirical regularities for innovative firms. Quantifying a generalized model for the recent U.S. economy using matched Census Bureau and patent data, we observe a modest departure for external R&D from perfect scaling frameworks.

Taxation and the International Mobility of Inventors

(w/ Salome Baslandze and Stefanie Stantcheva)

American Economic Review, 2016, 106(10): 2930-81.

Read more at: The Wall Street Journal, The Telegraph, The Telegraph (Comment), VoxEU, NBER Digest, Microeconomic Insights.

Abstract: This paper studies the effect of top tax rates on inventors' mobility across OECD countries since 1977. We put special emphasis on "superstar'' inventors, those with the most and most valuable patents. We use data on inventors from the United States Patent Office to track inventors' locations over time and combine it with international effective top tax rate data. We construct a detailed set of proxies for inventors' counterfactual incomes in each possible destination country including, among others, measures of patent quality and technological fit with each potential destination. We find that superstar top 1% inventors are significantly affected by top taxes rates when deciding on where to locate. The elasticity of domestic inventors to the net-of-tax rate is 0.04, while the elasticity of foreign inventors is 1.3. The elasticities to top net-of-tax rates decline as one moves down the quality distribution of inventors. Inventors who have worked in multinational companies are more likely to take advantage of tax differentials. On the other hand, if the company of an inventor has a higher share of its research activity in a given country, the inventor is less sensitive to the tax rate in that country. We perform extensive robustness checks, including using an alternative dataset based on European Patent Office filings.

Innovation Network

(w/ Daron Acemoglu and William Kerr)

Proceedings of the National Academy of Sciences, 2016, 113(41): 11483–11488.

Abstract: Technological progress builds upon itself, with the expansion of invention in one domain propelling future work in linked fields. Our analysis uses 1.8 million U.S. patents and their citation properties to map the innovation network and its strength. Past innovation network structures are calculated using citation patterns across technology classes during 1975--1994. The interaction of this pre-existing network structure with patent growth in upstream technology fields has strong predictive power on future innovation after 1995. This pattern is consistent with the idea that when there is more past upstream innovation for a particular technology class to build on, then that technology class innovates more.

Creative Destruction and Subjective Wellbeing

(w/ Philippe Aghion, Angus Deaton and Alexandra Roulet)

American Economic Review, 2016, 106(12): 3869-3897.

(Click here for the Online Appendix)

Read more at: American Economic Association.

Abstract: In this paper we analyze the relationship between turnover-driven growth and subjective wellbeing. Our model of innovation-led growth and unemployment predicts that: (i) the effect of creative destruction on expected individual welfare should be unambiguously positive if we control for unemployment, less so if we do not; (ii) job creation has a positive and job destruction has a negative impact on wellbeing; (iii) job destruction has a less negative impact in US Metropolitan Statistical Areas (MSA) within states with more generous unemployment insurance policies; (iv) job creation has a more positive effect on individuals that are more forward-looking. The empirical analysis using cross-sectional MSA-level and individual-level data provides empirical support to these predictions.

Transition to Clean Technology

(w/ Daron Acemoglu, Douglas Hanley and William Kerr)

Journal of Political Economy, 2016, 124(1): 52-104.

Abstract: We develop a microeconomic model of endogenous growth where clean and dirty technologies compete in production and innovation -in the sense that research can be directed to either clean or dirty technologies. If dirty technologies are more advanced to start with, the potential transition to clean technology can be difficult both because clean research must climb several steps to catch up with dirty technology and because this gap discourages research effort directed towards clean technologies. Carbon taxes and research subsidies may nonetheless encourage production and innovation in clean technologies, though the transition will typically be slow. We characterize certain general properties of the transition path from dirty to clean technology. We then estimate the model using a combination of regression analysis on the relationship between R&D and patents, and simulated method of moments using microdata on employment, production, R&D, firm growth, entry and exit from the US energy sector. The model's quantitative implications match a range of moments not targeted in the estimation quite well. We then characterize the optimal policy path implied by the model and our estimates. Optimal policy heavily relies on research subsidies as well as carbon taxes. We use the model to evaluate the welfare consequences of a range of alternative policy structures. For example, just relying on carbon taxes or delaying intervention both have significant welfare costs -though their implications for medium run temperature increases are quite different.

Abstract:  An endogenous growth model is developed where each period firms invest in researching and developing new ideas. An idea increases a firm's productivity. By how much depends on how central the idea is to a firm's activity. Ideas can be bought and sold on a market for patents. A firm can sell an idea that is not relevant to its business or buy one if it fails to innovate. The developed model is matched up with stylized facts about the market for patents in the U.S. The analysis attempts to gauge how efficiency in the patent market affects growth.

Innovation, Reallocation and Growth

(w/ Daron Acemoglu, Nicholas Bloom and William Kerr)

NBER Working Paper #18993

Revise and Resubmit, American Economic Review

Abstract: We build a model of firm-level innovation, productivity growth and reallocation featuring endogenous entry and exit. A key feature is the selection between high- and low-type firms, which differ in terms of their innovative capacity. We estimate the parameters of the model using detailed US Census micro data on firm-level output, R&D and patenting. The model provides a good fit to the dynamics of firm entry and exit, output and R&D, and its implied elasticities are in the ballpark of a range of micro estimates. We find industrial policy subsidizing either the R&D or the continued operation of incumbents reduces growth and welfare. For example, a subsidy to incumbent R&D equivalent to 5% of GDP reduces welfare by about 1.5% because it deters entry of new high-type firms. On the contrary, substantial improvements (of the order of 5% improvement in welfare) are possible if the continued operation of incumbents is taxed while at the same time R&D by incumbents and new entrants is subsidized. This is because of a strong selection effect: R&D resources (skilled labor) are inefficiently used by low-type incumbent firms. Subsidies to incumbents encourages the survival and expansion of these firms at the expense of potential high-type entrants. We show that optimal policy encourages the exit of low-type firms and supports R&D by high-type incumbents and entry.

Innovation and Top Income Inequality

(w/ Philippe Aghion, Antonin Bergeaud, Richard Blundell, and David Hemous)

NBER Working Paper #21247

Read more at: VoxEU, US News

Revise and Resubmit, Review of Economic Studies.

Abstract: In this paper we use cross-state panel data to show a positive and signi cant correlation between various measures of innovativeness and top income inequality in the United States over the past decades. Two distinct instrumentation strategies suggest that this correlation (partly) reflects a causality from innovativeness to top income inequality, and the effect is signi cant: for example, when measured by the number of patent per capita, innovativeness accounts on average across US states for around 17% of the total increase in the top 1% income share between 1975 and 2010. Yet, innovation does not appear to increase other measures of inequality which do not focus on top incomes. Next, we show that the positive effects of innovation on the top 1% income share are dampened in states with higher lobbying intensity. Finally, from cross-section regressions performed at the commuting zone (CZ) level, we find that: (i) innovativeness is positively correlated with upward social mobility; (ii) the positive correlation between innovativeness and social mobility, is driven mainly by entrant innovators and less so by incumbent innovators, and it is dampened in states with higher lobbying intensity. Overall, our findings vindicate the Schumpeterian view whereby the rise in top income shares is partly related to innovation-led growth, where innovation itself fosters social mobility at the top through creative destruction.

The Role of Information in Innovation and Competition

(w/ Qingmin Liu)

(Click here for the Online Appendix)

Journal of the European Economic Association, 2016, 14(4): 828-870.

Abstract:  Innovation is typically a trial-and-error process. While some research paths lead to the innovation sought, others result in dead ends. Because firms benefit from their competitors working in the wrong direction, they do not reveal their dead-end findings. Time and resources are wasted on projects that other firms have already found to be fruitless. This is a major problem, particularly in industries that rely heavily on trial-and-error research. We offer a simple model with two firms and two research lines to study this prevalent problem. We characterize the equilibrium in a decentralized environment that necessarily entails significant efficiency losses due to wasteful dead-end replication and a flight to safety -an early abandonment of the risky project. We show that different types of firms follow different innovation strategies and create different kinds of welfare losses. In an extension of the core model, we also study a centralized mechanism whereby firms are incentivized to disclose their actions and share their private information in a timely manner.

Networks and the Macroeconomy: An Empirical Exploration

(w/ Daron Acemoglu and William Kerr)

NBER Macro Annual 2015, ed. by Martin Eichenbaum and Jonathan Parker, 2016, Vol 30: 276-335.

Read more at: Bloomberg

Abstract: The propagation of macroeconomic shocks through input-output and geographic networks can be a powerful driver of macroeconomic fluctuations. We first exposit that in the presence of Cobb-Douglas production functions and consumer preferences, there is a specific pattern of economic transmission whereby demand-side shocks propagate upstream (to input supplying industries) and supply-side shocks propagate downstream (to customer industries) and that there is a tight relationship between the direct impact of a shock and the magnitudes of the downstream and the upstream indirect effects. We then investigate the short-run propagation of four different types of industry-level shocks: two demand-side ones (the exogenous component of the variation in industry imports from China and changes in federal spending) and two supply-side ones (TFP shocks and variation in knowledge/ideas coming from foreign patenting). In each case, we find substantial propagation of these shocks through the input-output network, with a pattern broadly consistent with theory. Quantitatively, the network-based propagation is larger than the direct effects of the shocks, sometimes by severalfold. We also show quantitatively large effects from the geographic network, capturing the fact that the local propagation of a shock to an industry will fall more heavily on other industries that tend to collocate with it across local markets. Our results suggest that the transmission of various different types of shocks through economic networks and industry interlinkages could have first-order implications for the macroeconomy.

Young, Restless, and Creative: Openness to Disruption and Creative Innovations

(w/ Daron Acemoglu and Murat Alp Celik)

NBER Working Paper #19894

Revise and Resubmit, Journal of Political Economy

Abstract: This paper argues that openness to new, unconventional and disruptive ideas has a first-order impact on creative innovations -innovations that break new ground in terms of knowledge creation. After presenting a motivating model focusing on the choice between incremental and radical innovation, and on how managers of different ages and human capital are sorted across different types of firms, we provide cross-country, firm-level and patent-level evidence consistent with this pattern. Our measures of creative innovations proxy for innovation quality (average number of citations per patent) and creativity (fraction of superstar innovators, the likelihood of a very high number of citations, and generality of patents). Our main proxy for openness to disruption is manager age. This variable is based on the idea that only companies or societies open to such disruption will allow the young to rise up within the hierarchy. Using this proxy at the firm, patent and country level, we present robust evidence that openness to disruption is associated with more creative innovations.

Patent Value and Citations: Creative Destruction or Strategic Disruption?

(w/ David S. Abrams and Jillian Popadak)

NBER Working Paper #19647

Abstract:  Prior work suggests that more valuable patents are cited more and this view has become standard in the empirical innovation literature. Using an NPE-derived dataset with patent-specific revenues we find that the relationship of citations to value in fact forms an inverted-U, with fewer citations at the high end of value than in the middle. Since the value of patents is concentrated in those at the high end, this is a challenge to both the empirical literature and the intuition behind it. We attempt to explain this relationship with a simple model of innovation, allowing for both productive and strategic patents. We find evidence of greater use of strategic patents where it would be most expected: among corporations, in fields of rapid development, in more recent patents and where divisional and continuation applications are employed. These findings have important implications for our basic understanding of growth, innovation, and intellectual property policy.

What Do We Learn from Schumpeterian Growth Theory?

(w/ Philippe Aghion and Peter Howitt)

in Handbook of Economic Growth, ed. by P. Aghion and S. N. Durlauf, 2014, Vol.2: 515-563.

Abstract: Schumpeterian growth theory has operationalized Schumpeter's notion of creative destruction by developing models based on this concept. These models shed light on several aspects of the growth process that could not be properly addressed by alternative theories. In this survey, we focus on four important aspects, namely: (i) the role of competition and market structure; (ii) firm dynamics; (iii) the relationship between growth and development with the notion of appropriate growth institutions; and (iv) the emergence and impact of long-term technological waves. In each case Schumpeterian growth theory delivers predictions that distinguish it from other growth models and which can be tested using micro data.

Optimal Capital Versus Labor Taxation with Innovation-Led Growth

(w/ Philippe Aghion and Jesus Fernandez-Villaverde)

NBER Working Paper #19086

Abstract: Chamley (1986) and Judd (1985) showed that, in a standard neoclassical growth model with capital accumulation and infinitely lived agents, either taxing or subsidizing capital cannot be optimal in the steady state. In this paper, we introduce innovation-led growth into the Chamley-Judd framework, using a Schumpeterian growth model where productivity-enhancing innovations result from profit-motivated R&D investment. Our main result is that, for a given required trend of public expenditure, a zero tax/subsidy on capital becomes suboptimal. In particular, the higher the level of public expenditure and the income elasticity of labor supply, the less should capital income be subsidized and the more it should be taxed. Not taxing capital implies that labor must be taxed at a higher rate. This in turn has a detrimental effect on labor supply and therefore on the market size for innovation. At the same time, for a given labor supply, taxing capital also reduces innovation incentives, so that for low levels of public expenditure and/or labor supply elasticity it becomes optimal to subsidize capital income.

Intellectual Property Rights Policy, Competition and Innovation

(w/ Daron Acemoglu)

Journal of the European Economic Association, 2012, 10(1): 1-42.

(Click for the Online Appendix)

Abstract: To what extent and in what form should the intellectual property rights (IPR) of innovators be protected? Should a company with a large technology lead over its rivals receive the same IPR protection as a company with a more limited advantage? The analysis of these questions necessitates a dynamic framework for the study of the interactions between IPR and competition, in particular to understand the impact of such policies on future incentives. In this paper, we develop such a framework. The economy consists of many industries and firms engaged in cumulative (step-by-step) innovation. IPR policy regulates whether followers in an industry can copy (or license or build upon) the technology of the leader. With full patent protection, followers can catch up to the leader in their industry only by making the same innovation(s) themselves (or by full licensing). We prove the existence of a steady-state equilibrium in a baseline environment and characterize some of its properties. We then quantitatively investigate the implications of different types of IPR policy on the equilibrium growth rate and welfare. The most important result from this exercise is that full patent protection is not optimal (welfare maximizing); instead, optimal policy involves state-dependent IPR protection, providing greater protection to technology leaders that are further ahead than those that are close to their followers. This form of the optimal policy results from the impact of policy on dynamic incentives, in particular from a form of trickle-down effect: providing greater protection to firms that are further ahead of their followers than a certain threshold increases the R&D incentives also for all technology leaders that are less advanced than this threshold.