The Arrow Replacement Effect and the Dynamics of US Inventors

Ufuk Akcigit and Nathan Goldschlag (my co-author and former student) have an important new paper on the employment and invention dynamics of US inventors. Amazingly they link data on inventors from patents to census data using anonymized, person-level identifiers, known as Protected Identification Keys (PIKs) so they also have individual data on earnings and employment and they link that data to data on firms.

Ultimately, we observe the employment histories of approximately 760 thousand inventors associated with 3.6 million patents granted between 2000 and 2016.

What they find is twofold. First, an increasing number of inventors are being hired by large incumbent firms (left below). Second, when inventors move to large incumbent firms they earn more but they invent less, compared to similar inventors who go to young firms (right below). Why would an incumbent firm pay more for less productive workers? One possible answer is the Arrow replacement effect, namely a monopolist has less incentive to innovate than a competitive firm becasue the monopolist has a bigger opportunity cost, namely it’s own profits. As Arrow put it: “The preinvention monopoly power acts as a strong disincentive to further innovation.” A logical extension is that a monopolist will be willing to pay not to innovate and one way of doing that is to hire inventors who, if they worked at an entrant, would threaten their monopoly profits.

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This is an important paper on declining dynamism in the US economy.

Addendum: In a second paper they use their extensive data to discuss the demographic characteristics of inventors.

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