Buy, Keep, or Sell: Economic Growth and the Market for Ideas
with Ufuk Akcigit and Jeremy Greenwood
Econometrica, 2016, 84(3): 943-984
Abstract: An endogenous growth model is developed where each period firms invest in researching and developing new ideas. An idea increases a firm’s productivity. By how much depends on the technological propinquity between an idea and the firm’s line of business. Ideas can be bought and sold on a market for patents. A firm can sell an idea that is not relevant to its business or buy one if it fails to innovate. The developed model is matched up with stylized facts about the market for patents in the United States. The analysis gauges how efficiency in the patent market affects growth.
The Dynamic Effects of Antitrust Policy on Growth and Welfare
with Laurent Cavenaile and Xu Tian
Journal of Monetary Economics, 2021, 121: 42-59
Abstract: To study the dynamic effects of antitrust policy on growth and welfare, we develop and estimate the first general equilibrium model with Schumpeterian innovation, oligopolistic product market competition, and endogenous M&A decisions. The estimated model reveals that: (1) Existing policies generate gains in growth and welfare. (2) Strengthening antitrust enforcement could deliver substantially higher gains. (3) The dynamic long-run effects of antitrust policy on social welfare are an order of magnitude larger than the static gains from higher allocative efficiency in production. (4) Current HHI-based antitrust rules leave the majority of anticompetitive acquisitions undetected, highlighting the need for alternative guidelines.
Radical and Incremental Innovation: The Roles of Firms, Managers, and Innovators
with Daron Acemoglu and Ufuk Akcigit
AEJ: Macroeconomics, 2022, 14(3): 199-249
Previously called: “Young, Restless and Creative: Openness to Disruption and Creative Innovations.”
Abstract: We investigate the determinants of radical (“creative”) innovations that break new ground in knowledge creation. We develop a model focusing on the choice between incremental and radical innovation and on how managers of different ages and human capital are sorted across firms. Firm- and patent-level evidence reveals that firms that are more “open to disruption” are significantly more likely to engage in radical innovation and hire younger managers and inventors with a comparative advantage in radical innovation. However, once the effect of the sorting is factored in, the (causal) impact of manager age on creative innovations, though positive, is small.
Acquiring Innovation Under Information Frictions
with Xu Tian and Wenyu Wang
Review of Financial Studies, 2022, 35(10): 4474-4517
Abstract: Acquiring innovation through M&A is subject to information frictions, as assessing the value of innovative targets is a challenging task. We find an inverted U-shaped relation between firm innovation and takeover exposure; equity usage increases with target innovation; and the deal completion rate drops with innovation. We develop and estimate a model of acquiring innovation under information frictions, featuring endogenous merger, innovation, and offer composition decisions. Our estimates suggest that acquirers’ due diligence reveals only 30% of private information possessed by targets. Eliminating information frictions increases capitalized merger gains by 59%, stimulates innovation, and boosts productivity, business dynamism, and social welfare.
Does the Cream Always Rise to the Top? The Misallocation of Talent in Innovation
Journal of Monetary Economics, 2023, 133: 105-128
Abstract: The misallocation of talent in innovation — “missing Einsteins” — has a first-order impact on growth and welfare. Surname-level empirical analysis combining inventor and census micro-data reveals people from richer backgrounds are more likely to become inventors, but those from high-education backgrounds become more prolific inventors. Motivated by this discrepancy, an endogenous growth model with financial frictions on the household side is developed. Individuals compete for scarce inventor training. The rich can become inventors even if mediocre through excessive credentialing spending. Shutting down credentialing spending raises innovation, growth, welfare, and inequality. Optimal progressive bequest taxes increase growth and welfare, but reduce inequality.
Agency Frictions, Managerial Compensation, and Disruptive Innovations
with Xu Tian
Review of Economic Dynamics, 2023, 51: 16-38
Abstract: Whether a manager leads the innovation efforts of a firm in line with shareholder preferences is key for firm value and growth. This, in turn, influences aggregate productivity growth and welfare. Data on US public firms reveals that (i) firms with better corporate governance tend to adopt highly incentivized contracts rich in stock options and (ii) such contracts are more likely to lead to disruptive innovations — patented inventions that are in the upper tail of the distribution in terms of quality and originality. Motivated by these empirical results, we develop and estimate a new dynamic general equilibrium model of firm-level innovation with agency frictions and endogenous determination of executive contracts. The model is used to study the joint dynamics of corporate governance, managerial compensation, and disruptive innovations, as well as the consequent aggregate implications on growth and welfare. Better corporate governance can reduce the influence of the manager in determining the compensation structure. This leads to more incentivized contracts and boosts innovation, with substantial benefits for the shareholders as well as the broader economy through knowledge spillovers. Removing agency frictions leads to contracts richer in stock options, boosting growth by 0.51pp, and welfare by 7.3% in consumption-equivalent terms. These findings are robust to incorporating short-termism. Short-termism itself is also detrimental, the removal of which increases welfare by 1.5%. Alleviating both frictions at the same time leads to amplified gains in growth and welfare.
Creative Destruction, Finance, and Firm Dynamics
Chapter in “The Economics of Creative Destruction“, 2023, Harvard University Press.
Abstract: New ideas are the engine of sustained economic growth and creative destruction. However, the processes through which they are generated and embedded in economic activity are laden with numerous inefficiencies. This paper provides an overview of the research on these processes and the associated bottlenecks, with an emphasis on the effects of finance and firm dynamics on the discovery, reallocation, and implementation of new ideas. A new endogenous growth model with collateral constraints is developed to highlight the interaction of financial frictions with firm innovation.