Technological Innovation, Resource Allocation, and Growth

Source: Kogan, L., Papanikolaou, D., Seru, A. & Stoffman, N. (2017) · Quarterly Journal of Economics 132(2), 665–712 · DOI: 10.1093/qje/qjw040

The idea

Construct a direct, market-based measure of the economic value of each patent by combining US patent

data with the stock-market reaction around the day the patent is granted, over 1926–2010. Because

valuable innovations produce larger price reactions, this weighting turns raw patent counts into an

economic measure of innovation. The measure predicts growth and reallocation and generates **creative

destruction*: a firm's value and productivity can fall when competitors* innovate.

Evidence

Validation: the firm's stock-market reaction to a patent grant strongly predicts the patent's

future citation count — but, unlike citations, the measure is available contemporaneously and over the

full long sample (citations are reliable only post-1975).

Growth/productivity: the innovation measure predicts subsequent productivity and output at the

firm, industry, and aggregate level; aggregate innovation is positively correlated with **TFP and

output** growth.

Reallocation: capital and labor flow away from non-innovating firms toward innovating firms

within an industry (and, more weakly, across industries).

Creative destruction: competitors' innovation is negatively related to a firm's productivity;

non-innovating firms cut capital and labor when rivals innovate, and rising industry innovation raises

the rate of firm exit (industry shakeouts).

Beats raw counts: repeating the firm-level analysis with the number of patent grants gives

qualitatively similar but 2–3× smaller economic magnitudes; consumption shows a U-shaped response

and aggregate Tobin's Q declines after innovation shocks (signatures of embodied technology shocks).

Why it matters

A widely used, openly shared measure of innovation value that links intangible/innovative capital to

the macroeconomy and to the cross-section of returns — relevant to value/growth, intangibles-adjusted

valuation, and the economics of technological change and creative destruction.

Caveats

The market-reaction measure inherits noise from the event window and confounding contemporaneous news.

Patents capture only part of innovation, and patent propensity varies across sectors.

Key references

Kogan, L., Papanikolaou, D., Seru, A. & Stoffman, N. (2017) — Technological Innovation, Resource Allocation, and Growth — Quarterly Journal of Economics

Hall, B., Jaffe, A. & Trajtenberg, M. (2005) — Market Value and Patent Citations — RAND Journal of Economics

Romer, P. (1990) — Endogenous Technological Change — Journal of Political Economy

Provenance: verified/generated from the paper's full text.