Money, History and Finance
Monday, December 02, 2019, 02:30pm - 04:00pm
Asaf Bernstein, University of Colorado
Abstract - The biggest financial crisis of the past century – the Great Depression – was coincident with the single largest shift in the organization of innovation – from predominantly outside to inside the firm - in U.S. history. Using a differences-in-differences design surrounding this period, we use this as a case study to explore how variation in local severity of a crisis can affect the local innovative activity of technological entrepreneurs and the organization of innovation. Our findings suggest that these shocks trigger massive, sudden, and persistent contractions in patenting among this class of inventors, consistent with a disruption of local angel financing. Parallel trends prior to the shock, evidence of a drop within every major technology class, and consistent findings with a distress predictor coming from local commodity price variability a decade earlier 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 a first glance. First, the average quality of surviving patents rises so much that there is no observable change in the aggregate future citations of these patents, in spite of the decline in the quantity of patents. Second, the shock is in part absorbed through a reallocation of inventors into established 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 financial crises are both destructive and creative forces for innovation and we provide the first systematic evidence of the direct role distress from the Great Depression, rather than technological change or regulation, played as a catalyst in this unprecedented structural shift in the nature of innovation.