Innovation Policy and the Economy 2013

Chatterji, Glaeser, and Kerr review recent academic work on the spatial concentration in the United States of entrepreneurship and innovation. They discuss rationales for the agglomeration of these activities and the economic consequences of clusters. They identify and discuss policies that are being pursued in the United States to encourage local entrepreneurship and innovation from both national and local perspectives. While arguments exist for and against policy support of entrepreneurial clusters, their understanding of what works and how it works is quite limited. The best path forward involves extensive experimentation and careful evaluation.

It is not surprising that the financing of early-stage creative projects and ventures is typically geographically localized because these types of investment decisions usually are predicated on personal relationships and due diligence, which require face-to-face interactions in response to high levels of risk, uncertainty, and information asymmetry. So, to economists, the recent rise of crowdfunding -- raising capital from many people through an online platform -- which offers little opportunity for careful due diligence and involves not only friends and family but also many strangers from near and far, is initially startling. On the eve of launching equity-based crowdfunding, a new market for early-stage finance in the United States, Agrawal, Catalini, and Goldfarb provide a preliminary exploration of its underlying economics. They highlight the extent to which economic theory, in particular transaction costs, reputation, and market design can explain the rise of non-equity crowdfunding, and offer a framework for speculating on how equity-based crowdfunding may unfold. They conclude by articulating open questions related to how crowdfunding may affect social welfare and the rate and direction of innovation.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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We draw inspiration from Tirole and Lerner (2002) for our title as well as approach to presenting the subject matter.
 

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by relaxing various restrictions concerning the sale of securities.2 However, the primary purpose of the Securities Act of 1933, which is the basis for most of the regulations in question, is to protect investors. Thus, relaxing these restrictions raises the concern that crowdfunding will expose investors to risk from fraud or incompetence (Hazen, 2012; Griffin, 2012). In the case of the Pebble, for example, despite disappointed and vocal funders, the Christmas season came and went without a single unit shipped or even produced. Although the well-intentioned inventor posted regular updates on his progress as he sourced components from vendors around the globe and set up a production facility in China, he was not able to fully fill his crowdfunded orders until April 2013. Anticipating these types of problems (and worse), the JOBS Act stipulated that equity crowdfunding required rules be set by the Securities and Exchange Commission (SEC), which were anticipated for January 2013 but are still in progress as of this writing. These two events in April 2012, the signing of the JOBS Act and the financing of the Pebble, legislated and demonstrated an innovation in the market for early-stage finance that could have significant economic consequences. Although the years of preamble leading to these events occurred primarily outside of mainstream attention, both events, particularly the former, raised general awareness of and interest in the potential of crowdfunding (Figure 1). Furthermore, although not mainstream and not equity-based, the early years of crowdfunding provide preliminary insight into the behavior of creators and funders. (For simplicity, we group entrepreneurs, artists, and others who initiate projects or ventures under the label "creators." We group investors, pre-buyers, and donors under the label "funders.") Crowdfunding developed primarily in the arts and creativity-based industries (e.g., recorded music, film, video games). Likely due to the network effects in this setting (to creators, the value of a platform increases with the number of funders and to funders the value of a platform increases with the number of creators and other funders), and similar to other online markets (e.g., eBay), crowdfunding has historically been dominated by a single platform. Originally, that was Sellaband, a music-only platform founded in 2006 and based in Amsterdam, and subsequently it was Kickstarter, a broader creative projects platform founded in 2009 and based in New York (we plot the growth of Kickstarter in Figure 2). Neither platform allows creators to issue equity for funding, although Sellaband did facilitate revenue sharing with funders during its first three years of operation. Still, data collected from funding activities on these platforms may provide clues to the types of user behavior that will emerge in equity-based crowdfunding. In particular, early research on non-equity crowdfunding indicates that: 1. Funding is not geographically constrained - When Sellaband offered royalty sharing to investors, more than 86% of the funds came from individuals who were more than 60 miles away from the entrepreneur, and the average distance between creators and investors was approximately 3,000 miles (Agrawal, Catalini, and Goldfarb, 2011).

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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For example, the law relaxes restrictions on general solicitation of securities, eases SEC reporting requirements, and raises from 500 to 2,000 the number of shareholders a company may have and still remain private.

2

Much debate exists around the impact that illegal file sharing may have on the creative industries. Similarly, opinions differ regarding whether the producers of artistic works should be forced to deal with any weakening of intellectual property rights resulting from illegal file sharing or if governments should intervene to protect these rights. Danaher, Smith, and Telang seek to inform these questions by outlining what we do and do not know from existing research. They first discuss whether file sharing displaces sales of media goods and then discuss whether such displacement will lead to reduced incentives to produce new creative works. They continue by summarizing recent findings on what businesses can do to compete with piracy and the effectiveness of anti-piracy policies on encouraging consumers to migrate from illegal to legal consumption channels. They conclude by demonstrating that without additional empirical evidence, it will be difficult to determine the socially optimal set of strategies and government copyright policies in the digital era.

Many believe that "big data" will transform business, government, and other aspects of the economy. Here, Einav and Levin discuss how new data may impact economic policy and economic research. Large scale administrative datasets and proprietary private sector data can greatly improve the way we measure, track, and describe economic activity. They also can enable novel research designs that allow researchers to trace the consequences of different events or policies. The authors discuss some of the challenges in accessing and making use of these data. They also consider whether the big data predictive modeling tools that have emerged in statistics and computer science may prove useful in economics.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 Author
 disclosures
 will
 be
 available
 on
 the
 NBER
 website.
 We
 thank
 Erin
 Scott
 and
 Scott
 Stern
 for
 comments
 

on
 an
 earlier
 draft.
 We
 are
 grateful
 for
 research
 support
 from
 the
 NSF
 and
 the
 Alfred
 P.
 Sloan
 Foundation.
 

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"There
 was
 five
 exabytes
 of
 information
 created
 between
 the
 dawn
 of
 civilization
 through
 2003,
 but
  that
 much
 information
 is
 now
 created
 every
 two
 days,
 and
 the
 pace
 is
 increasing."
 
  Eric
 Schmidt,
 former
 CEO
 of
 Google,
 2010.2