Firms and the Quality of Innovations

We study the macroeconomic implications of the tradeoff between speed and quality in innovation. Empirically, we document long-run trends in the increasing speed of innovation alongside declining quality at large firms. Leveraging variation from an exogenous policy change, we document the existence of the speed-quality tradeoff both at the firm and aggregate levels. How much can the transition to speed away from quality explain the fall in economic growth? We develop a quantitative endogenous growth model in which firms balance a tradeoff between the speed and quality of their innovations. When labor shifts towards speed, this decreases growth, particularly when there are private benefits to innovation or heterogeneous spillovers. Linking microdata to macroeconomic outcomes, we quantify the model and find that the recent growth slowdown is mainly due to changes in the innovation production function — firms are becoming more efficient in speed and less efficient in quality. JEL Codes: O30, O31, O33, O40, J63