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NBER Reporter OnLine: 2013 Number 3

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In This Issue:

Program Report: Productivity, Innovation and Entrepreneurship

Research Summaries:
Banking Crises and the Federal Reserve as a Lender of Last Resort during the Great Depression?

The Economics of Variations in Health and Health Care

International Mobility of Research Scientists

Inflation-Indexed Bonds

NBER Profiles
Conferences

Bureau News
Program Meetings

Bureau Books

Productivity, Innovation and Entrepreneurship Program



Nicholas Bloom and Josh Lerner*

The Productivity, Innovation and Entrepreneurship Program was founded as the Productivity Program, with Zvi Griliches as the inaugural program director, in 1978. It has more recently expanded to incorporate the vibrant and growing body of research in the affiliated fields of innovation and entrepreneurship. The program benefitted tremendously from Griliches' inspirational leadership, continued by Ernst Berndt after Zvi's untimely death in 1999. We have had the privilege of co-directing the program since 2011.

The program has generated a remarkable volume of research activity. It currently has 90 active members, and the program's cumulative output includes more than 1,350 affiliated working papers on a wide range of topics. The activities of the program are organized into four large project areas. These are: economic research on the measurement and drivers of productivity growth; entrepreneurship, which focuses on the measurement, causes and effects of new business creation; innovation, which examines R&D, patenting and creative activities; and digitization, a recently-launched project area, which focuses on the creation, use and impact of digital information. This review summarizes the research in each of these four areas.

Economic Research on Productivity

As Paul Krugman famously quipped, "Productivity isn't everything, but in the long run it is almost everything. A country's ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker." 1 Rising productivity has been the key to American growth over the last two centuries and will be the key to improving the lives of many millions in the developing world. Even in the recent recession, there has been an active and ongoing debate about the long-term potential growth rate of U.S. output. Understanding productivity growth is a central topic in economics, and one that naturally overlaps with many other NBER programs.

The research by program affiliates displays a strong emphasis on the roles of research and development, patents, incentive systems, regulations, technological progress and organizational form in influencing the extent and nature of productivity growth. In addition, the PRIE Program has long had a sharp focus on economic measurement, including inputs, outputs, prices, quality change, and multifactor productivity, that has been led in particular by the Conference on Research in Income and Wealth (CRIW). Activities on the broad subject of productivity center on spring and summer research meetings. These meetings allow program members to present work in progress on a variety of productivity topics. The summer meetings are split into sessions that focus on macroeconomic aspects of productivity, and on productivity issues in developing countries. Given the breadth of the program's research, we can highlight only a few examples of the research issues that program members explore.

One strand of research revolves around the productivity and performance of health care. For example, one recent study examines the traditional wisdom that market forces are weak in the health care sector, leading to a massive dispersion of performance across hospitals. 2 If poorly performing hospitals rarely close, there should exist a huge dispersion of performance. The paper finds that indeed while there is a large spread of performance across hospitals, surprisingly it is comparable to the extent of dispersion in other sectors like manufacturing and retail. 3 Moreover, much like manufacturing, the health care sector shows a strong link between market share and productivity – high performing hospitals grow faster than other low performing hospitals, so that performance and size are strongly linked. The paper concludes the health care is far less of an exceptional industry than is commonly believed, looking in fact rather similar to sectors like manufacturing on certain market dimensions.

Another strand of the program focuses on the importance of micro and macro forces in driving aggregate productivity. Researchers often highlight two ways aggregate productivity can rise: firstly there is the reallocation "batting average" effect, whereby if more productive firms expand and less productive firms contract, then average productivity rises. 4 The second is the macro "rising tide" effect, whereby if innovation and development increase the productivity of every firm, aggregate productivity also rises. One recent paper on this topic investigated the role of adjustment costs and volatility in explaining the dispersion and average of productivity across over 30 developing countries. 5 The authors found that low productivity in developing countries may be the result of extremely volatile micro-productivity of firms, making it hard for market forces to reallocate output appropriately. This highlights how removing distortions and adjustment costs, as well as reducing market turbulence and uncertainty, can aid the promotion of successful firms.

A third strand of work centers around management and managers. For example, one recent paper 6 shows how the structure of top management in U.S. firms has radically changed since the 1980s. CEOs have doubled the number of managers reporting to them, with a large rise in the number of ‘product’ managers (R&D, marketing) as firms have focused their businesses, and in ‘functional’ managers (finance, law, human resources) as firms invest more heavily in information technology. General managerial positions have shrunk as a share of the total, and the pay of such managers has fallen as more specialized product and functional managers have joined. Another study on a related topic detailed the collection of extensive data on the daily activities of Indian CEOs. 7 It revealed that there is a massive variation in their activities, with CEOs who adopt a more structured routine involving internal cross-functional meetings tending to be more successful compared to those with more ‘free’ time focused on outsiders. It also reported that CEO hours are strongly linked with performance, and that non-family CEOs tend to be much harder working and dedicated – in particular, showing they battle to work even during monsoons and Indian international cricket matches. This highlights how CEO types, hours and management styles are an important driver of firm productivity, and the importance of starting to explore what these are and how to measure them.

The CRIW is also an important component of the program's research activities on productivity issues. One of its goals is to support the development of the national accounts and associated statistics. It represents an ongoing collaboration between the statistical agencies, policy community, and academia to advance the field of economic measurement. As such, the membership of the CRIW is split between academic and non-academic members. The CRIW is funded by the statistical agencies and the organization has a sixteen person executive committee, chaired by Charles Hulten, that elects the membership and arranges for individual conferences.

The CRIW organizes a workshop at the NBER Summer Institute which tackles a range of data-related topics. In 2012, for example, one focus was on the emerging value of "big data," including both administrative records from government agencies and transaction and customer data from private firms. The CRIW also sponsors an annual conference. In 2013 the topic will be "Measuring and Modeling Health Care Costs", and in 2014, "Measuring Entrepreneurial Businesses: Current Knowledge and Challenges." These conferences usually result in a conference volume published under the auspices of the NBER.

Entrepreneurship

The PRIE Program's activities in the entrepreneurship area, and the NBER's efforts more broadly, are directed by Antoinette Schoar, an NBER Research Associate at MIT's Sloan School of Management. Activities in this area were launched at a 2003 meeting that included many of the leading researchers from various fields of economics that touched on entrepreneurship. This meeting led to a broad consensus that by many measures, the years since 1980 had seen a dramatic increase in the importance of entrepreneurial activity in the United States. While the overall growth in the number of entrepreneurial firms and business starts was relatively modest, the role of new enterprises in fomenting innovation, stimulating employment, and creating value for investors increased dramatically. Yet surprisingly, academic research—particularly in economics—had not kept pace. The number of articles on entrepreneurship issues in the major economics journals actually declined in the 1990s from the levels seen in the 1980s. A number of factors might explain this pattern. While data on public firms are readily available in machine-readable databases such as those maintained by the Center for Research in Security Prices, and Compustat, information on young private firms is much harder to come by. Datasets on entrepreneurial firms are in many cases only available through the time-consuming cultivation of personal contacts, and even then are often of widely variable quality.

In an effort to encourage research on entrepreneurship and to build a network of researchers who could share data and other insights, and with the ongoing support of the Ewing Marion Kauffman Foundation, the NBER launched an entrepreneurship initiative, which has carried out three broad types of research activity. First, the group convenes a semi-annual meeting of researchers interested in entrepreneurship research. During the 2013 Summer Institute, for example, more than 100 scholars participated, ranging from Ph.D. candidates to some of the most senior scholars in the field. This meeting has brought together researchers working on a wide range of topics and presentations have included papers ranging from the financing of entrepreneurs and venture capital funding,8 to macro implications of entrepreneurship and self-employment,9 to entrepreneurship in developing countries10 .

Second, the entrepreneurship initiative has sponsored a number of meetings on specialized topics. The first was on academic entrepreneurship. The idea that academic science is an engine of growth, creating technological opportunities for industrial innovation as well as future scientific research, is well known and studied. Little is known, however, about the role of academic entrepreneurship—faculty participation in commercialization of their inventions and new firm creation—in the innovation process. The project offered a range of new insights on the nature of the entrepreneurship process that emerges from colleges and universities. The second meeting focused on the strategy and structure of entrepreneurial firms.11 It provided a forum for rigorous research on the microeconomic and institutional foundations of entrepreneurship, and the strategic and market consequences of entrepreneurial activity. The third meeting focused on international differences in entrepreneurship. It was motivated by the concern that far too much of the research into entrepreneurship was focused on the United States. This project sought to encourage a range of studies by a global team of scholars. A fourth conference was motivated by the unprecedented activity in private equity, despite which most of the academic research on private equity markets was undertaken as a result of the previous leveraged buyout (LBO) wave of the 1980s.

The third major activity of the entrepreneurship initiative is outreach to young scholars interested in entrepreneurship. At many universities, graduate students interested in entrepreneurship have few knowledgeable scholars with whom to discuss their research. The consequences in many cases are either the abandonment of the research agenda, or the production of inferior research. Beginning in the summer of 2008, the NBER has brought together graduate students in doctoral programs in the United States and Europe for a four-day "boot camp" on entrepreneurship research. The Entrepreneurship Research Boot Camp (ERBC), which is organized by Thomas Hellmann, is typically held immediately following the NBER Entrepreneurship summer meeting. ERBC participants are Ph.D. students who have completed at least one year (and ideally two or three) of their Ph.D. program, and are committed to doing research on entrepreneurship.

Innovation Policy

The PRIE program's activities on innovation policy, and those of the NBER more generally, are directed by Scott Stern, an NBER Research Associate at the MIT Sloan School of Management. This effort, including the Innovation Policy and the Economy (IPE) meeting which is held in Washington each year, was launched in 1999 to provide first-class researchers with frequent and repeated interaction with other researchers interested in innovation, and with those who deal with specific policy questions. Early support was provided by the Alfred P. Sloan Foundation. More recently, the Kauffman Foundation provided partial support for the IPE program as well, focusing on specifically on the relationship between entrepreneurship and public policy.

This effort examines a wide range of issues, including any policy that affects the ability of an economy to produce scientific and technological progress or that mediates the impact that science and technology has on the process of economic growth. Thus the area of attention is broader than "science and technology policy," which typically connotes a focus on issues such as federal R&D policy and fiscal incentives for private R&D. Recent research discussed at meetings of the innovation group has touched on the role of intellectual property rights in affecting innovation12 , the impact of incentives for innovation on the production of new ideas13 , and the role of innovation in the health care sector14 .

The NBER's innovation policy initiative has four primary activities, the first of which is the IPE meeting. For more than ten years, the NBER has hosted this meeting in Washington geared to an audience of congressional and administration staff and other policymakers and policy analysts. The organizers solicit the papers for this meeting, identifying particular individuals who have been active researchers in areas of policy interest, and who have the skills and inclination to interact with a broader audience. These meetings are not organized around a single theme, but rather include about six papers on topics of current policy interest. The meeting concludes with a luncheon address by an academic economist currently involved in public service such as the Chairman of the Council of Economic Advisers. In recent years, these meetings have traditionally attracted between 125 and 150 people from the executive and legislative branches, as well as from other Washington organizations, as well as members of the press. Each of these meetings results in an annual edited volume.

The second activity is a meeting at the NBER Summer Institute featuring the presentation of early-stage research. One day of this meeting has typically focused on the economics of intellectual property. Collectively, these meetings have highlighted research on a wide range of issues in innovation policy, such as the Orphan Drug Act, the drivers of regional entrepreneurship, R&D manpower policy, a range of issues related to the patent system, and the evaluation of various innovation policy programs. These sessions have been organized in recent years by Pierre Azoulay, Jeff Furman, Ben Jones, and Scott Stern.

Third, the innovation policy initiative convenes occasional research conferences. One particularly notable meeting, held in 2010, was organized to mark the 50th anniversary of The Rate and Direction of Inventive Activity, a volume published by the NBER in 1962. This historical volume contains several landmark papers in the economics of technological change, including Kenneth Arrow's essay on "Economic Welfare and the Allocation of Resources for Invention." The 2010 conference and subsequent volume, The Rate and Direction of Inventive Activity Revisited, sought to commemorate the achievements of the original volume, and to sponsor new theoretical and empirical contributions on fundamental questions in the economics of innovation and technological change. In 2013, the group convened for another meeting titled "The Changing Frontier: Rethinking Science and Innovation Policy." The proceedings of this meeting, which focused on the impact of the changing nature of scientific research and innovation, for example, the rise of scientific teams, increased internationalization, and rising specialization, will be published as an NBER volume.

Finally, the innovation policy initiative administers an annual series of modest research grants, and appoints an Innovation Policy and the Economy Fellow. The IPE Fellow is a junior scholar who has the opportunity to spend a year in residence at the NBER and to participate in the activities of the IPE group and those of the NBER more generally.

The Economics of Digitization

The fourth distinct project within the PRIE program focuses on the economics of digitization. This project is led by NBER researchers Shane Greenstein, of Northwestern University, and Scott Stern. The starting point for this project is the recognition that the creation, support, use, and consumption of digital representation of information has touched a wide breadth of economic activities. In less than a generation the costs of storage, com¬putation, and transmission of information have declined by several orders of magnitude, lowering the costs of many final products and enabling the creation of an enormous range of new applications. Digitization has transformed social interactions, facilitated entirely new industries and undermined others, and reshaped the ability of people – consumers, job seekers, managers, government officials, and citizens – to access and leverage information. This project is supported by the Alfred P. Sloan Foundation.

The digitization project examines the causes and consequences of digitization for market actors – for their choices over strategic organization, market conduct, and public policies. This project seeks to identify and stress unaddressed research areas, and to tackle questions about business strategy and economics touched by legal forms for governing property rights in information, in particular copyright and open source. Of the various technology drivers enabling the rise of digital technology, growth in digital communication – particularly the internet – has played a central role. Not surprisingly, therefore, this project emphasizes research on internet technology and its economics.

The digitization project has focused on several core themes. One concerns the analysis of supply and demand in internet-mediated markets. These studies help to explain how internet technology came to be widespread, and they explore how the benefits and costs of moving information to a digital format determined internet diffusion. A second theme explores how internet technology changes market behavior and outcomes. These studies explore, in particular, how digitization altered economic frictions such as search costs and distribution costs over a wide range of economic activity. Research on this theme also emphasizes the constraints on the ability of digital technology to overcome such frictions. A third theme explores the impact of the changes associated with digitization on policy and vice versa. If search and distribution costs are lower and information sharing is easy, how does that affect local sales taxes, local restrictions on information, and the demand for privacy? What issues can government policy address, and what consequences – anticipated and unanticipated – result from different types of intervention? The economics of digitization project has hosted two meetings, each of which has included not only economists but also lawyers and business leaders.

This project has convened two meetings as part of the NBER Summer Institute. These have been organized by Susan Athey, Erik Brynjolfsson, Shane Greenstein and Hal Varian. The papers presented at these meetings have touched on a range of issues, including the role of copyright protection in the music industry15 , the microeconomics of digitization (online content, market structures, impacts on the economy and society), and the macroeconomics of digitization (the role of IT in driving U.S. growth, inequality and innovation). The project also sponsored a recent conference that included sixteen papers, organized by Shane Greenstein, Catherine Tucker, and Avi Goldfarb: the published proceedings will represent an important reference on this emerging topic area.16 This project also offers fellowship support for a Ph.D. student who is completing a dissertation on some topic related to the economics of digitization, and it offers small grants to more senior researchers who are working on this topic.

* Bloom, a Professor of Economics at Stanford University, and Lerner, the Jacob H. Schiff Professor of Investment Banking at the Harvard Business School, co-direct the NBER's Program on Productivity, Innovation, and Entrepreneurship.


1. P. R. Krugman, The Age of Diminished Expectations (Cambridge: MIT Press, 1994).

2. A. Chandra, A. Finkelstein, A. Sacarny, and C. Syverson, "Healthcare Exceptionalism? Productivity and Allocation in the U.S. Healthcare Sector," NBER Working Paper No. 19200, July 2013.

3. Examples include A. Collard-Wexler and J. De Loecker, "Reallocation and Technology: Evidence from the U.S. Steel Industry," NBER Working Paper No. 18739, January 2013; E. Basker, "Raising the Barcode Scanner: Technology and Productivity in the Retail Sector," NBER Working Paper No. 17825, February 2012; and L. Foster, J. Haltiwanger, and C. Syverson, "The Slow Growth of New Plants: Learning About Demand?" NBER Working Paper No. 17853, February 2012.

4. Examples include D. Acemoglu, U. Akcigit, N. Bloom and W. Kerr, "Innovation, Reallocation, and Growth," NBER Working Paper No. 18993, April 2013, and M. Nishida, A. Petrin and S. Polanec, "Exploring Reallocation's Apparent Weak Contribution to Growth," NBER Working Paper No. 19012, May 2013.

5. A. Collard-Wexler, J. Asker, and J. De Loecker, "Productivity Volatility and Misallocation of Resources in Developing Economies,” NBER Working Paper No. 17175, June 2011.

6. M. Guadalupe, H. Li, and J. Wulf, "Who Lives in the C-Suite? Organizational Structure and the Division of Labor in Top Management," NBER Working Paper No. 17846, February 2012.

7. O. Bandiera, A. Prat, and R. Sadun, "Managing Firms in an Emerging Economy: Evidence from the Time Use of Indian CEOs," Harvard Business School working paper, April 2013.

8. R. Nanda and M. Rhodes-Kropf, "Investment Cycles and Start-up Innovation," Harvard Business School Entrepreneurial Management Working Paper 12-032, December 2012.

9. T. Fort, J. Haltiwanger, R. Jarmin, and J. Miranda, "How Firms Respond to Business Cycles: The Role of Firm Age and Firm Size," NBER Working Paper No. 19134, August 2013.

10. A. Adhvaryu, N. Kala, and A. Nyshadham, "Booms, Busts, and Household Enterprise: Evidence from Coffee Farmers in Tanzania," Yale School of Public Health working paper, March 2013.

11. The proceedings were published in the Fall 2009 issue of the Journal of Economics and Management Strategy.

12. H. Williams, "Intellectual Property Rights and Innovation: Evidence from the Human Genome," NBER Working Paper No. 16213, July 2010.

13. P. Azoulay, J. Graff Zivin and G. Manso, "Incentives and Creativity: Evidence from the Academic Life Sciences," RAND Journal of Economics 42 (2011), 527-54. Also NBER Working Paper No. 15466, October 2009.

14. D. Cutler, "Where are the Health Care Entrepreneurs? The Failure of Organizational Innovation in Health Care," in Innovation Policy and the Economy, Volume 11, J. Lerner and S. Stern, eds., Chicago: University of Chicago Press, 2010. Also NBER Working Paper No. 16030, May 2010.

15. J. Waldfogel, "Copyright Protection, Technological Change, and the Quality of New Products: Evidence from Recorded Music since Napster", Journal of Law and Economics 55 (2012), pp. 715-40. Also NBER Working Paper No. 17503, October 2011.

16. S. Greenstein, C. Tucker, and A. Goldfarb, The Economics of Digitization (in process).

 
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