Financial Innovation in the 21st Century: Evidence from U.S. Patents
We develop a unique dataset of 24 thousand U.S. finance patents granted over last two decades to explore the evolution and production of financial innovation. We use machine learning to identify the financial patents and extensively audit the results to ensure their reasonableness. We find that patented financial innovation is substantial and economically important, with the number of annual grants expanding from a few dozen in the 1990s to over 2000 in the 2010s. The subject matter of financial patents has changed, consistent with the industry’s shift in revenue and value-added towards household investors and borrowers. The surge in financial patenting was driven by information technology firms and others outside of financial sector, which collectively accounted for 69% of the awards. The location of innovation has shifted, with banks moving this activity from regions with tight financial regulation to more permissive ones. High-tech regions have attracted financial innovation by payments, IT, and other non-financial firms. Turning to the source of these ideas, while academic knowledge remained associated with more valuable patents, citations in finance patents to academic papers, especially in those by banks, fell sharply.
Harvard Business School’s Division of Research and Doctoral Programs provided financial support for this project. We thank Martin Baily, Robin Greenwood, Tarek Hassan, Yael Hochberg (discussant), Howell Jackson, Bill Kerr, Adam Jaffe, Mark Lemley, Danielle Li (discussant), Thomas Philippon, Chris Seaman, Andrei Shleifer, John Squires, Andy Toole, and participants at seminars at the Bank of Italy, Harvard Business School, Stanford Law School, the University of Michigan, and the 2021 Harvard-MIT Financial Economics Workshop, the 2020 Finance, Organizations and Markets conference, and the 2021 American Finance Association meetings for helpful comments. Special acknowledgements are due to Tarek Hassan and Aakash Kalyani for undertaking the earnings call analysis on our behalf; Tom Howells, for patiently explaining the BEA data; Chris Seaman, for sharing his compilation of DTSA cases; and Rick Townsend, for allowing us to use his patent-venture capital mapping. Patrick Clapp, Amin Gulamali, Franko Jira, Stephen Moon, Mahlon Reihman, Kathleen Ryan, Rhys Sevier, James Zeitler, and especially Zunda Xu provided excellent research assistance. Lerner has received compensation for consulting with financial institutions. All errors and omissions are our own. First Version: September 2020. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.