The project adopts the view that firms differ fundamentally in the extent to which their innovations contribute to aggregate productivity. Ideally, the most creative and innovative firms should expand their operations at the expense of the less creative firms, which would increase aggregate productivity. However, firm panel data document the co-existence of firms with very different productivity levels, suggesting that the selection process is imperfect.
Intellectual Merit
There is very little empirical work done on firm innovation based on micro panel data. The project breaks new ground in making inferences about innovation processes based on firm panel and worker flows data.
The project studies the impediments to the selection process. One impediment is the innovation process itself limits expansion by requiring costly investment in R&D with an uncertain outcome. A second impediment is due to the firm's costly acquisition of labor inputs from the labor market. The expansion of activities by more creative firms requires worker reallocation from less to more creative firms. If the labor market fails to facilitate such reallocation, returns to innovation are reduced.
The project studies a broad range of policies that affect the selection process. This includes the study of research and development subsidies and patent law design, but also importantly the impact of labor market policies on innovation. Policies such as mandatory severance payments, minimum wages, unemployment benefit design could potentially affect innovation in non-trivial ways to the degree that it reduces the market's ability to reallocate workers between firms.
The empirical part of the project is based on U.S. and Danish micro panel data.
Broader Impacts. The project informs policy decisions in the areas of research and development subsidies and patent laws as well as a long range of labor market policies in relation to their impact on firm innovation and aggregate productivity. Furthermore, the project produces a coherent view of the structure that governs firm innovation and growth. The project relates this structure to modern micro panel data. These types of data are typically confidential and subject to restricted access. The project sets forth estimation methods that facilitate research replication and transparency.
