Crisis Innovation

Tania Babina, Asaf Bernstein and Filippo Mezzanotti

No 27851, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The effect of financial crises on innovation is an unsettled and important question for economic growth, but one difficult to answer with modern data. Using a differences-in-differences design surrounding the Great Depression, we document that local distress caused a sudden and persistent decline in patenting by the largest organizational form of innovation at this time—technological entrepreneurs. Parallel trends prior to the shock, evidence of a drop within every major technology class, and consistent results using distress driven by commodity shocks—all suggest a causal effect of distress. Despite this, we find that innovation during crises can be more resilient than it may appear at first glance. First, there is no observable change in the number of future citations, despite the decline in the number of patents filed. Second, the shock is in part absorbed through a reallocation of inventors into firms, who over the long-run produce patents with greater impact. Third, the results reveal no immediate brain drain of inventors from the affected areas. Overall, we demonstrate that crises can be both destructive and creative forces for innovation, and provide the first systematic evidence of the role played by the Great Depression in the long-run organization of innovative activity.

JEL-codes: G01 G21 N12 N22 N32 O3 (search for similar items in EconPapers)
Date: 2020-09
New Economics Papers: this item is included in nep-ent, nep-gro, nep-his, nep-ino, nep-lab and nep-sbm
Note: CF DAE EFG PR
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