Tania Babina – Columbia Business School
17 January 2020 @ 10:00 am - 11:30 am
Tania Babina (Columbia), Asaf Bernstein (Colorado), Filippo Mezzanotti (Northwestern)
September 9, 2019
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.