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The Rise of Industrial AI in America: Microfoundations of the Productivity J-curve(s)
April 2025
Working Paper Number:
CES-25-27
We examine the prevalence and productivity dynamics of artificial intelligence (AI) in American manufacturing. Working with the Census Bureau to collect detailed large-scale data for 2017 and 2021, we focus on AI-related technologies with industrial applications. We find causal evidence of J-curve-shaped returns, where short-term performance losses precede longer-term gains. Consistent with costly adjustment taking place within core production processes, industrial AI use increases work-in-progress inventory, investment in industrial robots, and labor shedding, while harming productivity and profitability in the short run. These losses are unevenly distributed, concentrating among older businesses while being mitigated by growth-oriented business strategies and within-firm spillovers. Dynamics, however, matter: earlier (pre-2017) adopters exhibit stronger growth over time, conditional on survival. Notably, among older establishments, abandonment of structured production-management practices accounts for roughly one-third of these losses, revealing a specific channel through which intangible factors shape AI's impact. Taken together, these results provide novel evidence on the microfoundations of technology J-curves, identifying mechanisms and illuminating how and why they differ across firm types. These findings extend our understanding of modern General Purpose Technologies, explaining why their economic impact'exemplified here by AI'may initially disappoint, particularly in contexts dominated by older, established firms.
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Startup Dynamics: Transitioning from Nonemployer Firms to Employer Firms, Survival, and Job Creation
April 2025
Working Paper Number:
CES-25-26
Understanding the dynamics of startup businesses' growth, exit, and survival is crucial for fostering entrepreneurship. Among the nearly 30 million registered businesses in the United States, fewer than six million have employees beyond the business owners. This research addresses the gap in understanding which companies transition to employer businesses and the mechanisms behind this process. Job creation remains a critical concern for policymakers, researchers, and advocacy groups. This study aims to illuminate the transition from non-employer businesses to employer businesses and explore job creation by new startups. Leveraging newly available microdata from the U.S. Census Bureau, we seek to gain deeper insights into firm survival, job creation by startups, and the transition from non-employer to employer status.
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Growth is Getting Harder to Find, Not Ideas
April 2025
Working Paper Number:
CES-25-21
Relatively flat US output growth versus rising numbers of US researchers is often interpreted as evidence that "ideas are getting harder to find." We build a new 46-year panel tracking the universe of U.S. firms' patenting to investigate the micro underpinnings of this claim, separately examining the relationships between research inputs and ideas (patents) versus ideas and growth. Over our sample period, we find that researchers' patenting productivity is increasing, there is little evidence of any secular decline in high-quality patenting common to all firms, and the link between patents and growth is present, differs by type of idea, and is fairly stable. On the other hand, we find strong evidence of secular decreases in output unrelated to patenting, suggesting an important role for other factors. Together, these results invite renewed empirical and theoretical attention to the impact of ideas on growth. To that end, our patent-firm bridge, which will be available to researchers with approved access, is used to produce new, public-use statistics on the Business Dynamics of Patenting Firms (BDS-PF).
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Investigating the Effect of Innovation Activities of Firms on Innovation Performance: Does Firm Size Matter?
January 2025
Working Paper Number:
CES-25-04
Understanding the relationship between a firm's innovation activities and its performance has been of great interest to management scholars. While the literature on innovation activities is vast, there is a dearth of studies investigating the effect of key innovation activities of the firm on innovation outcomes in a single study, and whether their effects are dependent on the nature of firms, specifically firm size. Drawing from a longitudinal dataset from the Business Research & Development and Innovation Survey (BRDIS), and informed by contingency theory and resource orchestration theory, we examine the relationship between a firm's innovation activities - including its Research & Development (R&D) investment, securing patents, collaborative R&D, R&D toward new business areas, and grants for R&D - and its product innovation and process innovation. We also investigate whether these relationships are contingent on firm size. Consistent with contingency theory, we find a significant difference between large firms and small firms regarding how they enhance product innovation and process innovation. Large firms can improve product innovation by securing patents through applications and issuances, coupled with active participation in collaborative R&D efforts. Conversely, smaller firms concentrate their efforts on the number of patents applied for, directing R&D efforts toward new business areas, and often leveraging grants for R&D efforts. To achieve process innovation, a similar dichotomy emerges. Larger firms demonstrate a commitment to securing patents, engage in R&D efforts tailored to new business areas, and actively collaborate with external entities on R&D efforts. In contrast, smaller firms primarily focus on securing patents and channel their R&D efforts toward new business pursuits. This nuanced exploration highlights the varied strategies employed by large and small firms in navigating the intricate landscape of both product and process innovation. The results shed light on specific innovation activities as antecedents of innovation outcomes and demonstrate how the effectiveness of such assets is contingent upon firm size.
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Industry Shakeouts after an Innovation Breakthrough
November 2024
Working Paper Number:
CES-24-70
Conventional wisdom suggests that after a technological breakthrough, the number of active firms first surges, and then sharply declines, in what is known as a 'shakeout'. This paper challenges that notion with new empirical evidence from across the U.S. economy, revealing that shakeouts are the exception, not the rule. I develop a statistical strategy to detect breakthroughs by isolating sustained anomalies in net firm entry rates, offering a robust alternative to narrative-driven approaches that can be applied to all industries. The results of this strategy, which reliably align with well-documented breakthroughs and remain consistent across various validation tests, uncover a novel trend: the number of entry-driven breakthroughs has been declining over time. The variability and frequent absence of shakeouts across breakthrough industries are consistent with breakthroughs primarily occurring in industries with low returns to scale and with modest learning curves, shifting the narrative on the nature of innovation over the past forty years in the U.S.
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The Role of R&D Factors in Economic Growth
November 2024
Working Paper Number:
CES-24-69
This paper studies factor usage in the R&D sector. I show that the usage of non-labor inputs in R&D is significant, and that their usage has grown much more rapidly than the R&D workforce. Using a standard growth decomposition applied to the aggregate idea production function, I estimate that at least 77% of idea growth since the early 1960s can be attributed to the growth of non-labor inputs in R&D. I demonstrate that a similar pattern would hold on the balanced growth path of a standard semi-endogenous growth model, and thus that the decomposition is not simply a by-product of rising research intensity. I then show that combining long-running differences in factor growth rates with non-unitary elasticities of substitution in idea production leads to a slowdown in idea growth whenever labor and capital are complementary. I conclude by estimating this elasticity of substitution and demonstrate that the results favor complimentarities.
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Entry Costs Rise with Growth
October 2024
Working Paper Number:
CES-24-63
Over time and across states in the U.S., the number of firms is more closely tied to overall employment than to output per worker. In many models of firm dynamics, trade, and growth with a free entry condition, these facts imply that the costs of creating a new firm increase sharply with productivity growth. This increase in entry costs can stem from the rising cost of labor used in entry and weak or negative knowledge spillovers from prior entry. Our findings suggest that productivity-enhancing policies will not induce firm entry, thereby limiting the total impact of such policies on welfare.
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The Geography of Inventors and Local Knowledge Spillovers in R&D
October 2024
Working Paper Number:
CES-24-59
I causally estimate local knowledge spillovers in R&D and quantify their importance when implementing R&D policies. Using a new administrative panel on German inventors, I estimate these spillovers by isolating quasi-exogenous variation from the arrival of East German inventors across West Germany after the Reunification of Germany in 1990. Increasing the number of inventors by 1% increases inventor productivity by 0.4%. I build a spatial model of innovation, and show that these spillovers are crucial when reducing migration costs for inventors or implementing R&D subsidies to promote economic activity.
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Competition, Firm Innovation, and Growth under Imperfect Technology Spillovers
July 2024
Working Paper Number:
CES-24-40
We study how friction in learning others' technology, termed 'imperfect technology spillovers,' incentivizes firms to use different types of innovation and impacts the implications of competition through changes in innovation composition. We build an endogenous growth model in which multi-product firms enhance their products via internal innovation and enter new product markets through external innovation. When learning others' technology takes time due to this friction, increased competitive pressure leads firms with technological advantages to intensify internal innovation to protect their markets, thereby reducing others' external innovation. Using the U.S. administrative firm-level data, we provide regression results supporting the model predictions. Our findings highlight the importance of strategic firm innovation choices and changes in their composition in shaping the aggregate implications of competition.
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Urban-Biased Growth: A Macroeconomic Analysis
June 2024
Working Paper Number:
CES-24-33
After 1980, larger US cities experienced substantially faster wage growth than smaller ones. We show that this urban bias mainly reflected wage growth at large Business Services firms. These firms stand out through their high per-worker expenditure on information technology and disproportionate presence in big cities. We introduce a spatial model of investment-specific technical change that can rationalize these patterns. Using the model as an accounting framework, we find that the observed decline in the investment price of information technology capital explains most urban-biased growth by raising the profits of large Business Services firms in big cities.
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