Crisis Innovation

60 Pages Posted: 28 Sep 2020 Last revised: 6 Feb 2021

See all articles by Tania Babina

Tania Babina

Columbia Business School - Finance and Economics

Asaf Bernstein

University of Colorado at Boulder; National Bureau of Economic Research (NBER)

Filippo Mezzanotti

Kellogg School of Management - Department of Finance

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Date Written: September 2020

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.

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Suggested Citation

Babina, Tania and Bernstein, Asaf and Mezzanotti, Filippo, Crisis Innovation (September 2020). NBER Working Paper No. w27851, Available at SSRN: https://ssrn.com/abstract=3700679

Tania Babina (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Asaf Bernstein

University of Colorado at Boulder ( email )

Campus Box 419
Boulder, CO 80309
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Filippo Mezzanotti

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

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