Abstract
The relationship between competition and innovation is hard to disentangle as exogenous variation in market structure is rare. Such a rare disruption is the 1952 breakup of Germany's leading chemical company, IG Farben. The Allies occupying Germany imposed the breakup because of IG Farben's importance for the German war economy instead of standard antitrust concerns. In technology areas where the breakup reduced concentration, patenting increased strongly, driven by domestic, non-IG Farben firms. An analysis of patent texts shows that in the short-run, the propensity to patent increases, but not in the long-run. The patenting activity of IG Farben's successors increased in comparison to a synthetic control and the successors' patenting specialized relative to the pre-breakup period. The results underscore the importance of competition in technology development for innovation.
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