Essays in the Economics of Innovation

Abstract

This dissertation examines the social and economic processes that generate innovation and distribute its rewards in society, in the context of the United States over the past twenty years. Chapters 1 and 4 investigate the two-way relationship between innovation and inequality. Chapters 2 and 3 study two recent and important trends in the US innovation system: the rise of teamwork and the activities of patent trolls.

Using detailed product-level data in the retail sector in the United States, Chapter 1 shows that product innovations disproportionately benefited high-income households due to increasing inequality and the endogenous response of supply to market size. From 2004 to 2013, annualized quality-adjusted inflation was 0.65 percentage points lower for high-income households, relative to low-income households. Using national and local changes in market size driven by demographic trends plausibly exogenous to supply factors, this chapter provides causal evidence that a shock to the relative demand for goods (1) affects the direction of product innovations, and (2) leads to a decrease in the relative price of the good for which demand became relatively larger (i.e. the long-term supply curve is downward sloping). A calibration shows that this effect is sufficiently strong to explain most of the observed difference in quality-adjusted inflation rates across the income distribution.

Chapter 2 demonstrates the importance of team-specific capital in the typical inventor's career. Using administrative tax and patent data for the population of US patent inventors from 1996 to 2012 and the premature deaths of 4,714 inventors, an inventor's premature death is found to cause a large and long-lasting decline in their co-inventor's earnings and citation-weighted patents (-4% and - 15% after 8 years, respectively). Firm disruption, network effects and top-down spillovers are ruled out as primary drivers of this result. Consistent with the team-specific capital interpretation, the effect is larger for more closely-knit teams and primarily applies to co-invention activities.

Chapter 3 investigates the patent acquisition behavior of non-practicing entities (NPEs), also-known as patent trolls. Unlike regular firms, NPEs purchase and assert patents that were granted by a specific set of examiners at the United States Patent Office (USPTO), who tend to allow incremental patents with vaguely-worded claims. The methodology introduced in this chapter leverages the random assignment of patent applications to examiners and provides a novel way of inferring the nature of a patent from prosecution data. A cost-benefit calibration suggests that investments in improving the quality of the examination process at the USPTO would have large social returns.

Using administrative records on the population of individuals who applied for or were granted a patent between 1996 and 2014, Chapter 4 characterizes the lives of more than 1.2 million inventors in the United States. Children of low-income parents are much less likely to become inventors than their higher-income counterparts and decompositions indicate that this income-innovation gap can largely be accounted for by differences in human capital acquisition while children are growing up. The importance of exposure effects during childhood is established by showing that growing up in an area with a high innovation rate in a particular technology class is associated with a much higher probability of becoming an inventor specifically in that technology class. Taken together, these descriptive findings shed light on which types of policy tools are likely to be most effective in sparking innovation. In particular, they suggest that “extensive margin” policies drawing more talented individuals from low-income families into innovation have great potential.