skip to main content


Title: Who Profits from Patents? Rent-Sharing at Innovative Firms*
Abstract This article analyzes how patent-induced shocks to labor productivity propagate into worker compensation using a new linkage of U.S. patent applications to U.S. business and worker tax records. We infer the causal effects of patent allowances by comparing firms whose patent applications were initially allowed to those whose patent applications were initially rejected. To identify patents that are ex ante valuable, we extrapolate the excess stock return estimates of Kogan et al. (2017) to the full set of accepted and rejected patent applications based on predetermined firm and patent application characteristics. An initial allowance of an ex ante valuable patent generates substantial increases in firm productivity and worker compensation. By contrast, initial allowances of lower ex ante value patents yield no detectable effects on firm outcomes. Patent allowances lead firms to increase employment, but entry wages and workforce composition are insensitive to patent decisions. On average, workers capture roughly 30 cents of every dollar of patent-induced surplus in higher earnings. This share is roughly twice as high among workers present since the year of application. These earnings effects are concentrated among men and workers in the top half of the earnings distribution and are paired with corresponding improvements in worker retention among these groups. We interpret these earnings responses as reflecting the capture of economic rents by senior workers, who are most costly for innovative firms to replace.  more » « less
Award ID(s):
1752431
PAR ID:
10133724
Author(s) / Creator(s):
; ; ;
Date Published:
Journal Name:
The Quarterly Journal of Economics
Volume:
134
Issue:
3
ISSN:
0033-5533
Page Range / eLocation ID:
1343 to 1404
Format(s):
Medium: X
Sponsoring Org:
National Science Foundation
More Like this
  1. ABSTRACT

    An employee's annual earnings fall by 13% in the first full calendar year after her firm's bankruptcy, and the present value of lost earnings from bankruptcy to six years following bankruptcy is 87% of pre‐bankruptcy annual earnings. More worker earnings are lost in thin labor markets and among small firms. Ex ante compensating wage differentials for this “bankruptcy risk” are up to 2% of firm value for a firm whose credit rating falls from AA to BBB, comparable in magnitude to debt tax benefits. Thus, wage premia for expected costs of bankruptcy are sufficiently large to be an important consideration in capital structure decisions.

     
    more » « less
  2. Many studies use matched employer-employee data to estimate a statistical model of earnings determination with worker and firm fixed effects. Estimates based on this model have produced influential yet controversial conclusions. The objective of this paper is to assess the sensitivity of these conclusions to the biases that arise because of limited mobility of workers across firms. We use employer-employee data from the US and several European countries while taking advantage of both fixed-effects and random-effects methods for bias-correction. We find that limited mobility bias is severe and that bias-correction is important. 
    more » « less
  3. Abstract

    A few large firms in the U.S. financial system achieve substantial economic gains. Their dominance sets them apart while also raising concerns about the suppression of worker earnings. Utilizing administrative data, this study reveals that the largest financial firms pay workers an average of 30.2% more than their smallest counterparts, significantly exceeding the 7.9% disparity in nonfinance sectors. This positive size-earnings relationship is consistently more pronounced in finance, even during the 2008 crisis or compared to the high-tech sector. Evidence suggests that large financial firms’ excessive gains, coupled with their workers’ sought-after skills, explain this distinct relationship. (JEL G20, J31, J42, L11, L12, L13)

     
    more » « less
  4. What explains pay inequality among coworkers? Theories of organizational influence on inequality emphasize the effects of formal hierarchy. But restructuring, firm flattening, and individualized pay setting have challenged the relevance of these structuralist theories. I propose a new organizational theory of differences in pay, focused on task structure and the horizontal division of labor across jobs. When organizations specialize jobs, they reduce the variety of tasks performed by some workers. In doing so they leave exclusive job turf to other coworkers, who capture the learning and discretion associated with performing a distinct task. The division of labor thus erodes pay premiums for some workers while advantaging others through job turf. I test this theory with linked employer–employee panel data from U.S. labor unions, which include a type of data that is rarely collected: annual reporting on work tasks. Results show that reducing task variety lowers workers’ earnings, while increasing job turf raises earnings. When organizations reduce task variety for some workers, they increase job turf for others. Without assuming fixed job hierarchies and pay rates, interdependencies in organizational task allocation yield unequal pay premiums among coworkers.

     
    more » « less
  5. Abstract

    Using U.S. Census firm-worker data, I document that firms’ financial distress has an economically important effect on employee departures to entrepreneurship. The impact is amplified in the high-tech and service sectors, where employees are key assets. In states with enforceable noncompete contracts, the effect is mitigated. Compared to typical entrepreneurs, distress-driven entrepreneurs are high-wage workers who found better firms, as measured by jobs, pay, and survival. Startup jobs compensate for 33% of job losses at the constrained incumbents. Overall, the financial inability of incumbent firms to pursue productive opportunities increases the reallocation of economic activity into new firms.

     
    more » « less