Some Simple Economics of the Blockchain

We rely on economic theory to discuss how blockchain technology and cryptocurrencies will influence the rate and direction of innovation. We identify two key costs that are affected by distributed ledger technology: 1) the cost of verification; and 2) the cost of networking. Markets facilitate the voluntary exchange of goods and services between buyers and sellers. For an exchange to be executed, key attributes of a transaction need to be verified by the parties involved at multiple points in time. Blockchain technology, by allowing market participants to perform costless verification, lowers the costs of auditing transaction information, and allows new marketplaces to emerge. Furthermore, when a distributed ledger is combined with a native cryptographic token (as in Bitcoin), marketplaces can be bootstrapped without the need of traditional trusted intermediaries, lowering the cost of networking. This challenges existing revenue models and incumbents's market power, and opens opportunities for novel approaches to regulation, auctions and the provision of public goods, software, identity and reputation systems.

Download Paper

Seeding the S-Curve? The Role of Early Adopters in Diffusion

In October 2014, all 4,494 undergraduates at the Massachusetts Institute of Technology were given access to Bitcoin, a decentralized digital currency. As a unique feature of the experiment, students who would generally adopt first were placed in a situation where many of their peers received access to the technology before them, and they then had to decide whether to continue to invest in this digital currency or exit. Our results suggest that when natural early adopters are delayed relative to their peers, they are more likely to reject the technology. We present further evidence that this appears to be driven by identity, in that the effect occurs in situations where natural early adopters' delay relative to others is most visible, and in settings where the natural early adopters would have been somewhat unique in their tech-savvy status. We then show not only that natural early adopters are more likely to reject the technology if they are delayed, but that this rejection generates spillovers on adoption by their peers who are not natural early adopters. This suggests that small changes in the initial availability of a technology have a lasting effect on its potential: Seeding a technology while ignoring early adopters' needs for distinctiveness is counterproductive.

Download Paper

Are Syndicates the Killer App of Equity Crowdfunding?

Syndicates cause a shift from crowdfunding startups to crowdfunding lead investors. They provide both the tools and incentives for lead investors to conduct due diligence and monitor post-investment activity and also to leverage their expertise and reputation when connecting with interested investors worldwide. By linking the online benefits of low transaction costs and global investor networks with the offline benefits of face-to-face interactions with founders, syndicates may result in a significant increase in the overall level of online investment activity. We report evidence that foreshadows a meaningful role for syndicates as a channel for allocating capital to early-stage ventures.

Disclosed Standard Essential Patents (dSEP) Database

The OEIDD database provides a full overview of all disclosed IPR at setting organizations world-wide. Based on the archives of thirteen major SSOs as of March 2011, the disclosure data is cleaned, harmonized, and all disclosed USPTO or EPO patents or patent applications are matched against patent identities in the PATSTAT database. Overall, the database contains 46,906 disclosed patents, patent applications or blankets, from 969 different firms, with 14057 USPTO or EPO patents or patent applications identified in PATSTAT, belonging to 4814 different INPADOC patent families and 5337 different DOCDB patent families.


Slack Time and Innovation

The extant literature linking slack time to innovation focuses on how slack time facilitates creative activities such as ideation, experimentation, and prototype development. We turn attention to how slack time may enable activities that are less creative but still important for innovation, namely mundane, execution-oriented tasks. First, we document the main effect: a sharp rise in innovative projects posted on a major crowdfunding platform when colleges are on break. Next, we report timing and project type evidence consistent with the causal interpretation that slack time drives innovation. Finally, we present a series of results consistent with the mundane task mechanism but not with the traditional creativity-related explanations. We do not rule out the possibility that creativity benefits from slack time. Instead, we introduce the idea that mundane, execution-oriented tasks, such as those associated with launching a crowdfunding campaign (e.g., administration, planning, promotion), are an important input to innovation that may benefit significantly from slack time.

Download working paper

Some Simple Economics of Crowdfunding

Ajay Agrawal (Univ. of Toronto), Christian Catalini (MIT), Avi Goldfarb (Univ. of Toronto)

It is not surprising that the financing of early-stage creative projects and ventures is typically geographically localized since these types of funding decisions are usually predicated on personal relationships and due diligence requiring face-to-face interactions in response to high levels of risk, uncertainty, and information asymmetry. 

So, to economists, the recent rise of crowdfunding - raising capital from many people through an online platform - which offers little opportunity for careful due diligence and involves not only friends and family but also many strangers from near and far, is initially startling.

On the eve of launching equity-based crowdfunding, a new market for early-stage finance in the U.S., we provide a preliminary exploration of its underlying economics. We highlight the extent to which economic theory, in particular transaction costs, reputation, and market design, can explain the rise of non-equity crowdfunding and offer a framework for speculating on how equity-based crowdfunding may unfold. We conclude by articulating open questions related to how crowdfunding may affect social welfare and the rate and direction of innovation.

Download working paper version

How Does Co-Location Affect the Rate and Direction of Innovative Activity?

The ability of an economy to generate, recombine and diffuse new ideas has a profound influence on its ability to sustain growth. Agglomeration, by eliminating the physical space between people, firms and ideas, affects not only the rate of innovation, but also the type of idea recombinations that take place. While the role of co-location on innovation has been extensively studied, the micro-foundations of knowledge transfer and generation still remain undeveloped.

Co-location, by increasing the frequency of interactions with very low expected value, qualitatively transforms the knowledge that is recombined, allowing for high levels of "exploration". This is particularly important when the uncertainty surrounding idea quality is high (e.g. early-stage research) and the outcome distribution is very skewed (e.g. scientific breakthroughs).

Leveraging a natural experiment, I analyze how geographic proximity impacts the recombination of ideas using a novel dataset of department relocations at UPMC Paris (1995-2010).

Collaborations across departments pairs are compared before and after co-location, a change that disproportionately affects low expected value interactions. Results are consistent with the idea that proximity has a profound influence both on the rate and the direction of innovative activity.

SSRN page

The Geography of Crowdfunding

Perhaps the most striking feature of "crowdfunding" is the broad geographic dispersion of investors in small, early-stage projects. This contrasts with existing theories that predict entrepreneurs and investors will be co-located due to distance-sensitive costs.

We examine a crowdfunding setting that connects artist-entrepreneurs with investors over the internet for financing musical projects. The average distance between artists and investors is about 3,000 miles, suggesting a reduced role for spatial proximity.

Still, distance does play a role. Within a single round of financing, local investors invest relatively early, and they appear less responsive to decisions by other investors. We show this geography effect is driven by investors who likely have a personal connection with the artist-entrepreneur ("family and friends").

Although the online platform seems to eliminate most distance-related economic frictions such as monitoring progress, providing input, and gathering information, it does not eliminate social-related frictions.

NBER Working Paper No. 16820

Intellectual Property Disclosure in Open Standards Development

Firms typically want to know whether a technology is covered by Intellectual Property (IP) rights before making it an industry standard. To promote transparency, Standard Setting Organizations require participants to disclose their IP during technical deliberations. We study the effectiveness of these policies. Specifically, we examine a large sample of IP disclosures and find that these declarations are often not very informative. The majority of disclosure statements do not list any specific piece of IP, or offer information on pricing beyond a commitment to license on “reasonable and non-discriminatory” terms. We also link the disclosure data to administrative records from the Internet Engineering Task Force, and find that unless there is a commitment to royalty-free licensing, disclosures reduce the probability that a proposal becomes a standard. Thus, while many firms remain reluctant to reveal IP, under the right conditions disclosure policies seem able to promote ex ante technological competition within SSOs.

Link to the slides

Tracing the links between science and technology: An exploratory analysis of scientists’ and inventors’ networks

The paper provides an exploratory analysis of the research networks linking scientists working in an open science environment, and researchers involved in the private technology domain. The study combines data on scientific co-authorship with data on patent co-invention, at the level of individual researchers, for three science-intensive technology fields, i.e. lasers, semiconductors and biotechnology, in order to assess the extent of the overlap between the two communities and to identify the role of key individuals in the process of knowledge transfer. Our findings reveal that the extent of the connectedness among scientists and inventors is rather large, and that particular individuals, i.e. authors-inventors, who act as gatekeepers and bridge the boundaries between the two domains, are fundamental to ensuring this connectivity. These individuals tend to occupy prominent positions in the scientific and the technological networks. However, our results also show maintaining a very central position in the scientific network may come at the expense of being able to fill a similarly central position in a technological network (and vice versa). Finally, preliminary analysis of the institutional origins of authors-inventors shows that one characteristic, distinctive of Europe compared to the United States, is associated with the relatively lower involvement of corporate scientists at the intersection between the two worlds of science and technology.

Download here: