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  5. Getting Innovation Incentives Right
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Getting Innovation Incentives Right

Paper Session

Saturday, Jan. 4, 2025 10:15 AM - 12:15 PM (PST)

Hilton San Francisco Union Square, Golden Gate 7&8
Hosted By: American Economic Association
  • Chair: Bronwyn H. Hall, University of California-Berkeley

Innovation for Social Progress: When Imperfect Appropriability Meets Incorrect Prices

Jacquelyn Pless
,
Massachusetts Institute of Technology

Abstract

Innovation for social progress—that which addresses society’s greatest challenges, like climate change and healthcare—is characterized by a unique “double-externality” challenge. Knowledge spillovers associated with imperfect appropriability drive a wedge between the social and private benefits of innovation, which is the case for innovation of all types, while production and consumption externalities lead to prices not fully reflecting the social benefits associated with innovations that address those externalities. For example, technologies that reduce pollution are “over-priced” without some corrective intervention, dampening firms’ incentives to invest in them. In this paper, I posit that these two market failures are interdependent and develop a micro-founded model showing how interdependence can enhance, attenuate, or reverse the expected effects of each externality on the direction of innovation relative to when they are considered in silos or when only additive. I then test these theoretical predictions by estimating their effects on firms’ R&D investments in innovations that protect the environment (clean energy technology and pollution-reducing innovation in the industrial sector) relative to those that are harmful. I leverage several sources of policy-induced variation in the user cost of R&D and the degree to which energy prices diverge from their socially-optimally levels to proxy for incorrect pricing. I find that knowledge spillovers exacerbate the negative effect of incorrect pricing on “clean” innovation under some conditions such that technology-neutral R&D tax credits could have unintended consequences for the direction of innovation.

Research and/or Development? Financial Frictions and Innovation Investment

Timothy Simcoe
,
Boston University
Filippo Mezzanotti
,
Northwestern University

Abstract

U.S. firms have reduced their investments in scientific research compared to product development. We use Census data to study how the composition of R&D responds to an increase in the cost of funds. Companies forced to refinance during the 2008 financial crisis made substantial cuts to R&D. These reductions were highly concentrated in basic and applied research, and their impact appears in citation-weighted patent output after three years. We explore several mechanisms and conclude that the overall pattern of results is consistent with an important role for technological competition in determining the composition of firms’ R&D investments.

The Intangible Divide: Why Do So Few Firms Invest in Innovation?

James Bessen
,
Boston University
Xiupeng Wang
,
Northeastern University

Abstract

Investments in software, R&D, and advertising have grown rapidly, now approaching half of U.S. private nonresidential investment. Yet just a few hundred firms account for almost all this growth. Most firms, including many large ones, regularly invest nothing in software and R&D, and this “intangible divide” has surprisingly deepened as intangible prices have fallen. Using comprehensive US Census microdata, we document these patterns and explore factors associated with intangible investment. We find that firms invest significantly less in innovation-related intangibles when their rivals invest more. Unlike tangible assets, one firm’s investment can obsolesce rivals’ investments. This negative pecuniary externality contributes to the intangible divide and may imply substantial misallocation.

The Effect of Public Science on Corporate R&D

Sharon Belenzon
,
Duke University
Ashish Arora
,
Duke University
Lia Sheer
,
Duke University
Larisa Cioaca
,
Duke University
Hansen Zhang
,
Duke University

Abstract

We study the relationships between corporate R&D and three components of public science: knowledge, human capital, and invention. We identify the relationships through firm-specific exposure to changes in federal agency R\&D budgets that are driven by the political composition of congressional appropriations subcommittees. Our results indicate that R&D by established firms, which account for more than three-quarters of business R&D, is affected by scientific knowledge produced by universities only when the latter is embodied in inventions or PhD scientists. Human capital trained by universities fosters innovation in firms. However, inventions from universities and public research institutes substitute for corporate inventions and reduce the demand for internal research by corporations, perhaps reflecting downstream competition from startups that commercialize university inventions. Moreover, abstract knowledge advances per se elicit little or no response. Our findings question the belief that public science represents a non-rival public good that feeds into corporate R&D through knowledge spillovers.

Discussant(s)
Ben Jones
,
Northwestern University
Abhishek Nagaraj
,
University of California-Berkeley
Tim Bresnahan
,
Stanford University
John van Reenen
,
London School of Economics
JEL Classifications
  • O3 - Innovation; Research and Development; Technological Change; Intellectual Property Rights
  • L1 - Market Structure, Firm Strategy, and Market Performance