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
Working Paper Version
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, forthcoming
Previously called: “Young, Restless and Creative: Openness to Disruption and Creative Innovations.”
Abstract: This paper investigates the determinants of radical (“creative”) innovations – innovations that break new ground in terms of knowledge creation. After presenting a motivating model focusing on the choice between incremental and radical innovation, and on how managers of different ages and human capital are sorted across different types of firms, we provide firm-level and patent-level evidence that firms that are more open to hiring younger managers (those that are more “open to disruption”) are significantly more likely to engage in radical innovation. Our measures of radical innovations proxy for innovation quality (average number of citations per patent) and creativity (fraction of superstar innovators, the likelihood of a very high number of citations, and generality of patents). We present robust evidence that firms that have a comparative advantage in new innovations (e.g., because they are more open to disruption) generate more creative innovations, but we also show that once the effect of the sorting of young managers to such firms 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, accepted
Abstract: An active M&A market incentivizes many firms to specialize in innovation with the anticipation of being acquired in the future. Acquiring innovation, however, is subject to information frictions, because acquirers often find it challenging to assess the value and impact of innovative targets. Using data on US public firms, we document that (1) there is a robust inverted U-shaped relation between a firm’s innovation and its takeover exposure; (2) equity usage increases with target innovation, and (3) deal completion rate drops as targets become more innovative. Motivated by these findings, we develop and estimate a model of acquiring innovation under information frictions. Our estimates suggest that acquirers’ due diligence reveals only 33% of private information possessed by targets, and eliminating the remaining information frictions can increase firms’ expected gains from the M&A market by 36%. This efficiency gain is achieved through a higher probability of mergers and larger value creation in completed transactions. We also find that a more efficient M&A market encourages more firm innovation, resulting in higher firm productivity growth and business dynamism. Firm size distribution becomes more polarized and the fraction of superstar firms increases.