Crisis Innovation

 Tania Babina (Columbia),  Asaf Bernstein (Colorado), Filippo Mezzanotti (Northwestern)

January 8, 2020

Abstract

In a differences-in-differences design we provide the first systematic evidence that distress from the Great Depression drove the single largest shift in innovative organization in U.S. history – from predominantly outside to inside the firm. 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 local distress. Despite this decline in patenting, innovation is quite resilient, with inventors moving into firms and the average quality of surviving patents rising so much there is no observable change in aggregate future citations.