The Long-Term Impact of Business Cycles on Innovation: Evidence from the Massachusetts Institute of Technology

Abstract

I explore a novel channel through which short-term economic uctuations affect the long-run innovative output of the U.S. economy: college graduates’ initial career choices. I develop a two-period Roy-style model to show that shocks to initial career choices could aect long-term patent production by changing graduates’ long-term occupational aliation or changing their acquisition of inventive human capital. Using a newly constructed data set on the patenting history of all individuals obtaining a bachelor’s degree from the Massachusetts Institute of Technology (MIT) between 1980 and 2005, I nd that cohorts graduating during economic booms produce signicantly fewer patents over the subsequent two decades. A one percentage point decrease in the unemployment rate in the year of scheduled graduation on average decreases the future annual patent output of a cohort by around 5%, or approximately 2.5 patents per year for an average-size cohort. Economic conditions at the time of graduation do not aect

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