Working Paper: NBER ID: w28980
Authors: Josh Lerner; Amit Seru; Nick Short; Yuan Sun
Abstract: We explore the evolution of financial innovation, using 24,000 U.S. finance patents applied for and granted over last two decades. Patented financial innovations are substantial and economically important, with annual grants expanding from a few dozen in the 1990s to over 2000 in the 2010s. The subject matter of financial patents has changed, consistent with the industry’s shift towards household investors and borrowers. The surge in financial patenting was driven by information technology and other non-financial firms. The location of innovation has shifted, with banks moving activity away from states with tight financial regulation. Concurrently, high-tech regions have attracted financial innovation by payments, IT, and other non-financial firms. Analyses of the returns to financial patents suggests that the social value of these innovations are higher than their private value. We present a simple model to explain these trends. The changing dynamics of financial innovation that began in the 1980s and 1990s may have lowered the private returns to innovation and increased the desirability of patent protection for financial innovations. Regulation of banks following the financial crisis of 2007 may have raised the costs of innovation, leading them to invest less in such activity.
Keywords: Financial Innovation; Patents; Consumer Finance; Regulatory Changes; Technology
JEL Codes: G20; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| changing dynamics of financial innovation since the 1980s and 1990s (F30) | lower private returns to innovation (O39) |
| changing dynamics of financial innovation since the 1980s and 1990s (F30) | increased desirability of patent protection for financial innovations (O34) |
| regulatory pressures following the financial crisis of 2007 (G28) | raised innovation costs (O31) |
| raised innovation costs (O31) | reduced investment in new financial products by firms (O16) |
| high-tech regions (L63) | attract financial innovation (G29) |
| banks shifting innovation activities away from states with strict financial regulations (G28) | reduced financial innovation in those states (G18) |
| social value of financial patents (G29) | private value of financial patents (G19) |
| inability of financial innovators to translate knowledge spillovers into market value (O36) | complex interaction between innovation and patent protection (O36) |