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Fencing Off Silicon Valley: Cross-Border Venture Capital and Technology Spillovers (with U. Akcigit, J. Lerner, R. Townsend, Y. Zhestkova), Journal of Monetary Economics (Carnegie-Rochester-NYU Conference Series), forthcoming

Read more: VoxEU

+ Abstract

The treatment of foreign investors has been a contentious topic in U.S. entrepreneurship policy in recent years. This paper examines foreign corporate investments in Silicon Valley from a theoretical and empirical perspective. We model a setting where such funding may allow U.S. entrepreneurs to pursue technologies that they could not otherwise, but may also lead to spillovers to the overseas firm providing the financing and the nation where it is based. We show that despite the benefits from such inbound investments for U.S. firms, it may be optimal for the U.S. government to raise their costs to deter investments. Using as comprehensive as possible a sample of investments by non-U.S. corporate investors in U.S. start-ups between 1976 and 2015, we find evidence consistent with the presence of knowledge spill-overs to foreign investors.

What Happened to U.S. Business Dynamism? (with U. Akcigit), 2023, Journal of Political Economy, 131(8), 2059-2124

Read more: VoxEU, WSJ, Brookings

+ Abstract

In the past several decades, the U.S. economy has witnessed a number of striking trends that indicate a rising market concentration and a slowdown in business dynamism. In this paper, we make an attempt to understand potential common forces behind these empirical regularities through the lens of a micro-founded general equilibrium model of endogenous firm dynamics. Importantly, the theoretical model captures the strategic behavior between competing firms, its effect on their innovation decisions, and the resulting “best vs. the rest” dynamics. We focus on four potential mechanisms that can potentially drive the observed changes and use the calibrated model to assess the relative importance of these channels. One particular exercise replicates the transitional dynamics of the U.S. economy through joint moves in all four channels and decomposes the contribution of each channel to the resulting trends. Our results highlight the dominant role of a decline in the intensity of knowledge diffusion from the frontier firms to the laggard ones in explaining the observed shifts. We conclude by presenting new evidence that corroborates a declining knowledge diffusion in the economy. We document higher concentration of patenting in the hands of firms with the largest stock and a changing nature of patents, especially in the post-2000 period, which suggests a heavy use of intellectual property protection by market leaders to limit the diffusion of knowledge. These findings present a potential avenue for future research on the drivers of declining knowledge diffusion.

Fewer but Better: Sudden Stop, Firm Entry, and Financial Selection (with F. Saffie), 2021, American Economic Journal: Macroeconomics, 13(3), 304-56

Read more: AEA Highlights

+ Abstract

We develop a tractable quantitative framework to study the productivity effects of financial crises. The model features endogenous productivity, heterogeneous firm dynamics, and aggregate risk. Selection of the most promising ideas gives rise to a tradeoff between mass (quantity) and composition (quality) in the entrant cohort. Chilean plant-level data from the sudden stop triggered by the Russian sovereign default in 1998 confirm the model's main mechanism, as firms born during the credit shortage are fewer, but better in terms of idiosyncratic productivity. The quantitative analysis shows that at the end of the crisis, total output is permanently 0.9% lower.

Ten Facts on Declining Business Dynamism and Lessons from Endogenous Growth Theory (with U. Akcigit), 2021, American Economic Journal: Macroeconomics, 13(1), 257-98

+ Abstract

In this paper, we review the literature on declining business dynamism and its implications in the United States and propose a unifying theory to analyze the symptoms and the potential causes of this decline. We first highlight 10 pronounced stylized facts related to declining business dynamism documented in the literature and discuss some of the existing attempts to explain them. We then describe a theoretical framework of endogenous markups, innovation, and competition that can potentially speak to all of these facts jointly. We next explore some theoretical predictions of this framework, which are shaped by two interacting forces: a composition effect that determines the market concentration and an incentive effect that determines how firms respond to a given concentration in the economy. The results highlight that a decline in knowledge diffusion between frontier and laggard firms could be a significant driver of empirical trends observed in the data. This study emphasizes the potential of growth theory for the analysis of factors behind declining business dynamism and the need for further investigation in this direction.

Slowing Business Dynamism and Productivity Growth in the United States (with U. Akcigit), 2020, Proceedings of the Jackson Hole Symposium.

Read more: Bloomberg, WSJ

+ Abstract

Business dynamism—the perpetual process of new firms forming, growing, shrinking, and dying—and the associated reallocation of factors toward more productive units is a fundamental source of aggregate productivity growth in a healthy economy. A variety of empirical regularities indicates that business dynamism in the United States has been slowing down since the 1980s, and even more strikingly, since the 2000s. We rationalize these regularities within a framework based on endogenous growth theory. Theoretical and quantitative investigations point to the role of factors that hamper the competition between the leaders and their competitors in U.S. industries as the key driver of the observed dynamics. In particular, a decline in knowledge diffusion, which allows laggard firms to learn from and implement the practices of the frontier firms, has potentially obstructed rivals from exerting enough competitive pressure on the frontier firms, leading dynamically to a decline in leaders’ incentives to experiment and innovate. We present a set of empirical findings that are consistent with our theory and briefly review case studies from other countries.

Working Papers

Innovation and Trade Policy in a Globalized World (with U. Akcigit and G. Impullitti). NBER WP 24543

Read more: VoxEU, The Atlantic

+ Abstract

What is the role of innovation policy in open economy? We address this question employing a new innovation-driven growth model with two large open economies at different stages of development. We examine the implications of the U.S. Research and Experimentation Tax Credit, introduced in 1981, and alternative protectionist policies. Key findings are: First, the tax credit generates substantial gains over medium and long horizons. Second, protectionist measures generate large dynamic losses by distorting the firms' innovation incentives. Third, the optimal R&D subsidy decreases in trade openness. Fourth, the optimal unilateral import tariff is zero for all policy horizons.

The Depth and Breadth of the Step-by-step Innovation Framework. Book chapter in “The Economics of Creative Destruction” in Honor of Philippe Aghion and Peter Howitt

+ Abstract

In Schumpeterian growth theory, the step-by-step innovation framework has a unique place with its realistic modeling of competition among firms and the effect of firms’ strategic behavior on innovation outcomes. As such, this framework provides a fertile ground for examining the basic mechanisms that link competition and innovation and how their interaction shapes firm dynamics and economic growth. In this piece, I summarize two recent papers building on this framework, Akcigit and Ates (2021) and Akcigit et al. (2021), which shed light on the slowing business dynamism in the U.S. economy and the implications of trade and industrial policy in open economies. Doing so, I will highlight key mechanisms as well as the wide-reaching applications of the step-by-step innovation model.

Corporate Taxes and Growth: The Impact of Financial Selection on Firm Entry (with F. Saffie) (earlier version: PIER Working Paper 13-011)

+ Abstract

A key engine of long-run economic growth is firm entry. Nevertheless, when projects are heterogeneous and good ideas are scarce, a mass-composition trade-off is introduced into this link: Larger cohorts have a lower average quality. The ability of financial intermediaries to select promising projects shapes the strength of this trade-off. We build a general equilibrium endogenous growth model with project heterogeneity and financial screening to study this relationship. We show that accounting for heterogeneity and selection allows the model to conciliate two well-documented and apparently contradictory effects of corporate taxation. Corporate taxation has a strong detrimental effect on firm entry while having a small, if any, negative effect on growth.

Beyond Cash: Venture Capital, Firm Dynamics, and Economic Growth

+ Abstract

This paper presents a new dynamic general equilibrium model of innovation with heterogeneous
firms that incorporates an explicit venture capital (VC) market. The data show that VC financing accounts
for a disproportionate share of sales and employment in the US compared with its limited share of total
investment. VC firms invest heavily in young and innovative firms, bringing operational knowledge, together
with financing, to their portfolio companies. The goal of this paper is twofold. First, I measure the particular
channels through which VC firms influence their undertakings, using a structural model. Second,
I explore the implications of VC investments for aggregate productivity and innovation policy. To address
these goals, I combine and structurally estimate an endogenous technical change model with a VC setting
that includes (i) the new feature of expertise, and (ii) the endogenous matching market where firms and
VCs meet. In this model, firms improve the quality of their innovative product through risky R&D. VC
expertise raises the efficiency of product development, and firms obtain VC financing at the cost of selling
an endogenously determined share of the company. The entry cost that VC companies face also introduces
a selection margin: VCs invest in firms that present a high potential for growth. The estimated model
captures certain features of the VC matches and innovation observed in the US data. Counterfactual experiments
imply that operational knowledge accounts for about 1/3 of VCs’ impact on aggregate growth.
Policy experiments suggest that changes affecting the VC market could result in a 7 basis point gain in the
long-run growth rate of the economy.


“Dynamic Gains from Trade Agreements with Intellectual Property Provisions” (Ana Maria Santacreu). FRB Dallas-U. of Houston-Banxico Annual Conference, 2023.  + Slides


“The Unintended Consequences of Financial Sanctions” (Ritt Keerati). PhD Symposium on Financial Stability (OFR), 2022.  + Slides

“The End of Economic Growth? Unintended Consequences of a Declining Population” (Charles Jones). International Workshop on NSE (Peking University), 2020.  + Slides


“Firm Growth through New Establishments” (Cao, Hyatt, Mukoyama, Sager). ASSA Annual Meeting, 2020.  + Slides

“A Theory of Falling Growth and Rising Rents” (Aghion, Bergeaud, Boppart, Klenow, Li). NBER SI Economic Growth, 2019.  + Slides

“Small and Large Firms Over the Business Cycle” (Crouzet and Mehrotra). Second Maryland Finance Conference (U. of Maryland), 2018.  + Slides

“Do Tax Incentives for Research Increase Firm Innovation? An RD Design for R&D” (Dechezleprêtre, Einiö, Martin, Nguyen, Van Reenen). ASSA Annual Meeting, 2018.  + Slides

“The Causes and Consequences of Going Public. Firm-Level Evidences from Twelve European Countries” (Panetta, Generale, Signoretti). World Finance Conference, 2013.  + Slides

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