Jane Olmstead-Rumsey, Professor, Northwestern University
Abstract: Since around 2000, U.S. aggregate productivity growth has slowed and product market concentration has risen. To explain these facts, I construct a measure of innovativeness based on patent data that is comparable across firms and over time and show that small firms make innovations that are more incremental in the 2000s compared to the 1990s. I develop an endogenous growth model where the quality of new ideas is heterogeneous across firms to analyze the implications of this finding. I use a quantitative version of the model to infer changes to the structure of the U.S. economy between the 1990s and the 2000s. This analysis suggests that declining innovativeness of market laggards can account for about 40 percent of the rise in market concentration over this period and the entire productivity slowdown. Strategic changes in firms’ R&D investment policies in response to the decreased likelihood of laggards making drastic improvements significantly amplify the productivity slowdown.