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  • 2021
  • Working Paper
  • HBS Working Paper Series

Financial Innovation in the 21st Century: Evidence from U.S. Patents

By: Josh Lerner, Amit Seru, Nick Short and Yuan Sun
  • Format:Print
  • | Language:English
  • | Pages:136
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Abstract

We develop a unique dataset of 24 thousand U.S. finance patents granted over the last two decades to explore the evolution and production of financial innovation. We use machine learning to identify the financial patents and extensively audit the results to ensure their reasonableness. We find that patented financial innovation is substantial and economically important, with the number of annual grants expanding from a few dozen in the 1990s to over 2000 in the 2010s. The subject matter of financial patents has changed, consistent with the industry’s shift in revenue and value-added towards household investors and borrowers. The surge in financial patenting was driven by information technology firms and others outside of the financial sector, which collectively accounted for 69% of the awards. The location of innovation has shifted, with banks moving this activity from regions with tight financial regulation to more permissive ones. High-tech regions have attracted financial innovation by payments, IT, and other non-financial firms. Turning to the source of these ideas, while academic knowledge remained associated with more valuable patents, citations in finance patents to academic papers, especially in those by banks, fell sharply.

Keywords

Banking; Investment Banks; Regulation; Banks and Banking; Information Technology; Governing Rules, Regulations, and Reforms; Finance; Innovation and Invention

Citation

Lerner, Josh, Amit Seru, Nick Short, and Yuan Sun. "Financial Innovation in the 21st Century: Evidence from U.S. Patents." Harvard Business School Working Paper, No. 21-136, June 2021.
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About The Author

Josh Lerner

Entrepreneurial Management
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More from the Authors
  • The Use and Misuse of Patent Data: Issues for Finance and Beyond By: Josh Lerner and Amit Seru
  • When Harry Fired Sally: The Double Standard in Punishing Misconduct By: Mark Egan, Gregor Matvos and Amit Seru
  • Shanghai Pudong Science and Technology Investment Co., Ltd.: December 2014 By: Josh Lerner
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