Julian Kolev, Business Economics PhD
Thesis Chair: Josh Lerner
Credit Constraints and the Nature of Innovation: Evidence from Venture Capital Exits
This paper examines the supply of entrepreneurial funding, and its impact on innovative output. It argues that while increases in private-sector funding drive higher quantities of innovation, they also lead to shifts toward shorter-horizon and more narrowly-focused projects, accompanied by transitions of inventors from academia into the private sector. I develop a model of credit constraints in a multi-stage research setting, and show that a relaxation of constraints should lead to both transitions into the private sector, and a shift toward shorter-horizon projects with a narrower range of application. I test these predictions using the patent output of a panel of life-science researchers linked to top universities. Taking advantage of venture-backed IPOs in the same region but in different industries, I identify exogenous variation in life-science investment, allowing for estimates of causality. Under both OLS and instrumental-variable specifications, I find that greater funding availability leads to an increase in transitions from academia to the private sector and a higher quantity of patent output, but a decrease in research quality, innovative scope, and the time horizon of subsequent impact. These results indicate that while profit-motivated funding increases the quantity of innovation in the short run, its long-run effects are less beneficial: it leads to a significant shift toward projects with less total impact, a shorter horizon of impact, and a narrower scope of application.