Abstract
Models of creative destruction posit that recessions are periods of reallocation and disruption, generating new ideas that catapult new firms to the frontier. However, empirical evidence suggests that research and development (R&D) expenditures and patenting is procyclical, not counter-cyclical. Using panel data on the quantity and quality of patents for nearly two decades, we provide a resolution to the tension by documenting that the quality of innovation is counter-cyclical: innovations produced during busts have a larger effect on the path of future research than those developed during booms. These results are a function of financial constraints that affect private sector firms most heavily, shifting the concentration of resources and time among R&D workers towards longer-term and basic science research in the public sector during busts. Our results suggest that the ongoing coronavirus pandemic could lead to large innovations in the future.
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