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Research Details

Crisis Innovation

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 by the Depression led to a sudden and persistent decline in patenting by the largest organizational form of innovation at this time—technological entrepreneurs, who are inventors operating outside firms. 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 local distress. Despite this negative effect, our evidence shows that innovation during crises can be more resilient than it may appear at first glance. First, there is no observable change in the impact of these patents as measured by the aggregate future citations of these patents, despite the decline in the number of patents filed. Second, the shock is in part absorbed through a reallocation of independent inventors into firms, which overall were less affected by the shock. Over the long-run, firms in more affected areas compensate for the decline in entrepreneurial innovation and produce patents with greater impact. Third, the results reveal no significant brain drain of inventors from the affected areas. Overall, our findings suggest that financial crises can be both destructive and creative forces for innovation, and provide the first systematic evidence of the role played by distress from the Great Depression in the long-run organization of innovative activity.

Type

Working Paper

Author(s)

Filippo Mezzanotti, Asaf Bernstein, Tania Babina

Date Published

2021

Citations

Mezzanotti, Filippo, Asaf Bernstein, and Tania Babina. 2021. Crisis Innovation.

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