University Innovation and the Professor’s Privilege 13 July 2015 NBER Entrepreneurship Workshop Hans Hvide, Bergen and CEPR Ben Jones, Kellogg and NBER

What policies promote innovation by university workforces? Question Experiment End of the “professor’s privilege” in Norway. Examine (1) start-ups and (2) patenting.

The “Professor’s Privilege” Reform  Norway eliminates “professor’s privilege” as of 2003  Similar reform in Germany, Austria, Denmark, and Finland; New policy similar to U.S. norms  Motivation: emulating U.S. will lead to more innovation (Lissoni et al. 2008, Czarnitzki et al. 2008) University researchers held full rights to their innovations Income shared between researcher (1/3) and university (2/3) Prior PolicyNew Policy

A Theoretical Basis? (Aghion and Tirole 1994, Scotchmer 2004, Holmstrom 1982, etc.)

Example from a CES Production Function Researcher investment University investment Innovative income

Data 1)Individual census 2)Business census Match: owner ID to individual ID  Treated group: university researchers, defined as workers who are employed at university and have Ph.D. Startups ( ) 1)All NPO patents 2)University employee database Match: Inventor names Patents ( )

Finding: Start-Up Rates per Worker Beginning of reform

Finding: Patent Rates per Worker Beginning of reform

Entrepreneurship Analysis

Summary Statistics for Entrepreneurs

Entrepreneurship: Quantity Panel Aggregate Sectoral Individual Control Group All Norway Non-Uni PhDs All Norway Non-Uni PhDs All Norway Non-Uni PhDs PS match DiD Finding 69% decline (***) 52% decline (**) 43% decline (**) 58% decline (***) 40% decline (*) 46% decline (**)  Same among “stayers”, suggesting intensive margin

Entrepreneurship: Quality  Accounting measures  In general, very few startups show substantial growth…  After reform, university startups show increased failure rates and fewer sales by 5 years, although effects are statistically weak  Technology intensity  Prior to reform, 27% of university start-ups were in higher technology sectors and 12% obtained a patent within 5 years of founding  After reform, 17% were in higher technology sectors and 2% obtained patent within 5 years

Patenting Analysis

Data: Summary Statistics

Patents: Quantity and Quality Panel Aggregate Individual Control Group Non-uni inventors DiD Finding 52% decline (***) 38% decline (***)  Quality  26% decline (**) in average citations received  Quantity

Discussion #1: University Commercialization Policy  What policies encourage university-based innovation? Experiment compares two policy regimes: 1)Give all rights to individual researcher 2)Use a one-third / two-third split of royalties, with university control  Regime (2) prevalent, e.g., in countries that removed the professor’s privilege and in the U.S. after Bayh-Dole Act  Is Norwegian experience representative?  Would other countries (incl. U.S.) see start-ups and patenting by university researchers double were researchers given 100% rights?  c.f., Lissoni 2008, Lach and Schankerman 2008, Czarnitski et al. 2015, Astebro et al. 2015

Discussion #2: Broader Applications  Property rights in innovation  Canonical theories in economics of innovation emphasize challenge of property rights allocation (Aghion & Tirole 1994; Green and Scotchmer 1995, etc.)  Here, evidence in line with this emphasis, showing very large effects on entrepreneurship and patenting  Taxes and entrepreneurship  Literature (e.g., Hubbard & Gentry 2000, Bruce & Gurley 2005) focuses on self-employed and sole proprietors, who may not play important roles in creating new ideas and driving growth  How does entrepreneurship by university researchers, who stand at knowledge frontier, respond to effective tax rates?  Lower bound argument: Policy reform not a simple tax, but given complementarities with university investments, simple tax increase would cause entrepreneurship to fall even more

Summary  Natural experiment: End of “professor’s privilege”  Find ~50% decline in quantity of (1) new venture formation and (2) patenting. Quality measures decline as well.  Application to university commercialization policy; also, rent-sharing in innovation and taxes/entrepreneurship.

Thank You

Literature #2: Rent Sharing and Innovation  Canonical theories about importance (and difficulty) of balancing rent- sharing across investing parties to encourage innovation (Aghion & Tirole 1994; Green and Scotchmer 1995).  What rent-sharing regime between a researcher and the university can best promote innovative outcomes?  Professor’s privilege reform provides a natural experiment to study whether/how a large change in the rent-sharing regime affects innovation in practice.

Literature #3: Taxes and Entrepreneurship  Literature on tax rates and “entrepreneurship” (e.g., Hubbard & Gentry 2000, Bruce & Gurley 2005) focuses on self-employed and sole proprietors, who may not represent kinds of entrepreneurship thought to play important roles in creating new ideas and driving growth (Glaser 2007, Levine & Rubinstein 2015).  How does entrepreneurship by researchers, who stand at frontier of science and technology, respond to effective tax rates?  Entrepreneurs in general may have motivations beyond income, and university-based researchers may value income less than others (e.g. Evans and Leighton 1989, Stern 2004, Roach and Sauermann 2012, 2014)  Professor’s privilege reform can inform how a large increase in effective tax rates on researchers influences their start-up activity

Researcher’s Innovative Effort c 1-s Slope is F E s=0s=1 G

Individual Regressions: All Workers  Individual-level controls (sex, marital status, lagged income and wealth, education dummies, age FE, individual FE) turn out to make little difference

Individual Regressions: Similar Workers Table 4 Startups, Individual Level, Similar Workers  Large effects also appear when restricting to relatively similar workers for control sample

Aggregate Regressions  Patent rate per university researcher drops ~50% in post-period compared to non-university inventors.

Individual Regressions: All Inventors  University inventors become like “normal” inventors in terms of patenting rate, conditional on patenting at least once.

What is the right balance of rents? Professor’s privilege The 1/3 rd norm …and letting researcher choose both investments would produce more innovative income than maximum possible here.

Discussion #3: Taxes and Entrepreneurship  How does entrepreneurship by university researchers, who stand at knowledge frontier, respond to effective tax rates?  Negatively.  Start-up rate falls ~50%, given a similar increase in tax rate.  Lower bound argument.  Policy reform not a simple tax.  But given complementarities with university investments, simple tax increase would cause entrepreneurship to fall even more (under reasonably general theoretical conditions). c 1-s Slope is F E s=0s=1 G