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The Economic Effects of Scientific Shocks

This paper studies the impact of advancements in basic science on the real economy. We construct a novel dataset of seminal academic papers in various scientific fields and interpret them as the exogenous advent of innovation possibilities (“scientific shocks”) for innovating firms. By using patent data, we directly link academic papers to firm-level observables. We then develop a two-sector, dynamic general equilibrium model with endogenous technical change and information frictions to classify scientific shocks into two broad categories: “breakthrough” scientific shocks, which generate a positive response in investment and in the rate of return on capital; and “dead-end” scientific shocks, which generate a positive response in investment but have a negative impact on the rate of return on capital. We characterize the dynamic response of investment, labor, R&D, output, and Tobin’s q of firms exposed to breakthrough and dead-end shocks. We show that, while only breakthrough shocks generate economically successful technologies, dead-end shocks can have a substantial contribution to long-run growth through dynamic technological spillovers.