Working Paper: NBER ID: w27851
Authors: Tania Babina; Asaf Bernstein; Filippo Mezzanotti
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.
Keywords: No keywords provided
JEL Codes: G01; G21; N12; N22; N32; O3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| local bank distress during the Great Depression (G21) | decline in patenting by independent inventors (O39) |
| local bank distress during the Great Depression (G21) | reallocation of inventors into firms (O31) |
| reallocation of inventors into firms (O31) | patents with greater impact over time (O34) |
| local bank distress during the Great Depression (G21) | no observable change in future citations of patents (O34) |