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Innovation, Productivity and Regulation

Paper Session

Friday, Jan. 3, 2020 8:00 AM - 10:00 AM (PDT)

Marriott Marquis, San Diego Ballroom A
Hosted By: American Economic Association
  • Chair: John Michael Van Reenen, Massachusetts Institute of Technology

The Impact of Regulation on Innovation

John Michael Van Reenen
,
Massachusetts Institute of Technology
Philippe Aghion
,
College of France
Antonin Bergeaud
,
Bank of France

Abstract

We study the impact of labor regulation on innovation. We exploit the threshold
in labor market regulations in France which means that when a firm reaches 50
employees, costs increase substantially. We show theoretically and empirically that
the prospect of these regulatory costs discourages firms just below the threshold
from innovating (as measured by patent counts). This relationship emerges when
looking nonparametrically at patent density around the regulatory threshold and
also in a parametric exercise where we examine the heterogeneous response of firms
to exogenous market size shocks (from export market growth). On average, firms
innovate more when they experience a positive market size shock, but this relationship
significantly weakens when a firm is just below the regulatory threshold. Using
information on citations we show suggestive evidence (consistent with our model)
that regulation deters radical innovation much less than incremental innovation.
This suggests that with size-dependent regulation, companies innovate less, but if
they do try to innovate, they “swing for the fence”.

Connecting to Power: Political Connections, Innovation, and Firm Dynamics

Ufuk Akcigit
,
University of Chicago
Salomé Baslandze
,
Einaudi Institute for Economics and Finance (EIEF)
Francesca Lotti
,
Bank of Italy

Abstract

Do political connections affect firm dynamics, innovation, and creative destruction? We study
Italian firms and their workers to answer this question. Our analysis uses a brand-new dataset,
spanning the period from 1993 to 2014, where we merge: (i) firm-level balance sheet data; (ii)
social security data on the universe of workers; (iii) patent data from the European Patent Office;
(iv) the national registry of local politicians; and (v) detailed data on local elections in Italy.
We find that firm-level political connections are widespread, especially among large firms, and
that industries with a larger share of politically connected firms feature worse firm dynamics.
We identify a leadership paradox: When compared to their competitors, market leaders are much
more likely to be politically connected, but much less likely to innovate. In addition, political
connections relate to a higher rate of survival, as well as growth in employment and revenue,
but not in productivity – a result that we also confirm using a regression discontinuity design.
We build a firm dynamics model, where we allow firms to invest in innovation and/or political
connection to advance their productivity and to overcome certain market frictions. Our model
highlights a new interaction between static gains and dynamic losses from rent-seeking in aggregate
productivity.

The Contribution of High-Skilled Immigrants to Innovation in the United States

Rebecca Diamond
,
Stanford University
Shai Bernstein
,
Stanford University
Timothy McQuade
,
Stanford University
Beatriz Pousada
,
Stanford University

Abstract

We characterize the contribution of immigrants to US innovation, both through their direct
productivity as well as through their indirect spillover effects on their native collaborators. To
do so, we link patent records to a database cotaining the first five digits of 160 million of Social
Security Numbers (SSN). By combining this part of the SSN together with year of birth, we
identify whether individuals are immigrants based on the age at which their Social Security
Number is assigned. We find that over the course of their careers, immigrants are more productive
than natives, as measured by number of patents, patent citations, and the economic
value of these patents. Immigrant inventors are more likely to rely on foreign technologies, to
collaborate with foreign inventors, and to be cited in foreign markets, thus contributing to the
importation and diffusion of ideas across borders. Using an identification strategy that exploits
premature inventor deaths, we find that immigrants collaborators create especially strong positive
externalities on the innovation production of natives, while natives create especially large
positive externalities on immigrant innovation production, suggesting that combining these different
knowledge pools into inventor teams is important for innovation. A simple decomposition
suggests that despite immigrants only making up 16% of inventors, they are responsible for 30%
of aggregate US innovation since 1976, with their indirect spillover effects accounting for more
than twice their direct productivity contribution.

Declining Business Dynamism: Sources and Productivity Implications

John Haltiwanger
,
University of Maryland
Russ Cooper
,
European University Institute
Jonathan Willis
,
Federal Reserve Bank of Kansas City

Abstract

This paper studies the sources of declining business dynamism for U.S. establishments. Recent evidence
has documented a declining pace of establishment-level job reallocation, a rising share of establishments with
no adjustment from one period to the next, and a reduction in the responsiveness of employment growth to
protability shocks at the establishment-level. Using a establishment-level dynamic optimization problem as a
framework for analysis, several potential reasons for this decline are studied: (i) a change in exogenous processes
for prots, (ii) an increase in impatience, (iii) increased market power and (iv) increasing adjustment costs.
Using this framework, we also assess the quantiative implications of each of these mechanisms for aggregate
productivity.
JEL Classifications
  • O3 - Innovation; Research and Development; Technological Change; Intellectual Property Rights
  • J8 - Labor Standards: National and International