R&D, Political Incentives, and Economic Impact

“The Puzzling Politics of R&D: Signaling Competence through Risky Projects” in Journal of Comparative Economics, 2021

Why do some incumbents devote significant funds to the support of Research and Development, even though the fruits of such investment typically appear after the incumbent has left the office? Unlike many other types of long-term government investment (such as education or infrastructure), government investment in R&D is less visible to the average voter. Moreover, it is highly risky. This paper investigates whether the mere fact of incumbent pursuing pro-R&D policy can result in higher expectations of future economic growth rewarded by the voters, or higher perception of the incumbent’s competence. It further asks whether pursuing R&D policy helps the incumbent to secure reelection. The paper proposes a theoretical model of signaling, provides evidence from survey experiments conducted in the USA and Russia and corroborates findings with cross-country evidence. The paper concludes that investment in R&D can generate higher perceptions of the incumbent’s competence, which is crucial, especially for countries with a history of high economic volatility.

“Why Governments Grow “Lemons” in the Market for Technology” [under review]

Governments around the world spend enormous amount of money on R&D. A large part of this investment is wasted, flooding the system with patents that never result in any actual innovation. This effect is especially pronounced in countries with low level of government accountability. To reconcile the growth of “lemon patents” with genuine desire of the government to spur innovation, we offer a game-theoretic model, in which the government has a significant stake in technological development and invests in R&D, even if this simultaneously encourages growth of “lemons”. We illustrate the mechanism by demonstrating the causal impact of Russia’s government policy, which resulted in a simultaneous increase in the number of high-quality patents and a decrease in the share of such patents in the patent pool.

“The Puzzling Politics of R&D: Political Connections and Innovation in Russia” [Paper available upon request]

Technological progress is an important factor in economic development, yet it can create problems for governments, if the costs are felt by their supporters while the benefits go to potential challengers. As a result, politicians face a trade-off between stifling economic growth and facing a threat of technological displacement of their supporters. This paper proposes a model of government support for innovation that preserves technological advantage of companies connected to the incumbent. Provided the government values the future higher than the companies, it can stimulate the development of new technologies by both connected and unconnected companies via co-funding the costs of innovation. In addition, it can condition provision of additional benefits received by the connected companies on the success of their research and development (R&D) project, stimulating extra effort on their part. This model implies three observable implications: governments will distribute cost-reducing grants to both connected and unconnected companies; connected companies will show a larger effect of R&D grant support on economic performance; and during the assessment period of R&D projects, government contracts will preferentially support connected companies. Analyzing evidence from a cost-reducing R&D support program in Russia, a trajectory-balancing approach produces results consistent with each of these implications.

“Patent Protection and Innovative Entrepreneurship: Examining Effect of Alice Ruling on Startup Funding (with Maxim Ananyev)

We study the effects of patent protection on innovative entrepreneurship. We use an exogenous variation in patent protection generated by the 2014 US Supreme Court ruling on Alice Corporation Pty. Ltd. v. CLS Bank International case. This case establishing a two-part test to determine if a software patent was unpatentable under US Patent Law, but implied no changes for litigation of non-software patents. The case held that known ideas are abstract, and reciting the use of a conventional computer in the claims to implement the known idea does not make the claim patentable subject matter.This ruling has greatly impacted the litigation of software patents, giving defendants in infringement cases a highly successful defense that could be used early in litigation. After Alice ruling, patent challenges in software rose by hundreds, making patent protection in software-related industries less secure. Using the database of US startups, we show that weakening of patent protection in software industry made in harder for firms in this industry to obtain start-up funding or get an ipo. We also show that it affects entry decision for the new startups.

Technology and Political Behavior

“Stability of Revolutionary Governments in the Face of Mass Protest” in European Journal of Political Economy, 2019 (with Dmitry Dagaev and Anton Sobolev)

Why do some newly introduced revolutionary governments face anti-government demonstrations and swiftly exit office, while others can establish political regimes that last for decades? Historical evidence finds revolutionary governments in the first decade of the twenty-first century to be three times more vulnerable to mass protest than a hundred years ago. What can explain this trend? This paper relates the stability of newly emerged revolutionary governments to the political composition of the remonstrations that brings a new incumbent to power and in factors that can shape it. Our theoretical model, incorporating protest into a dynamic Downsian framework, features the significant role of protest coordination, communication technology, ideology, and the coercive capacity of the regime. This paper contributes to the literature in several ways. First, it discusses a new historical trend of the instability of revolutionary governments. Second, it proposes a model that helps to understand the growing instability of revolutionary regimes, as well as conditions that undermine their stability. In equilibrium, it is possible to have a revolutionary government overthrown by a popular uprising, even though it gained power on the wave of popular support. Third, under a set of conditions, the new incumbent would always come from a different part of the political spectrum. Fourth, the model unpacks the warm glow component of protesters’ decision to take to the streets. Finally, we provide implications for the endogenous choice of policy by the revolutionary incumbent for protest dynamics.

Political Economy of Autocracy

“The Role of Business in Shaping Economic Policy” in The New Autocracy: Information, Politics, and Policy in Putin’s Russia, 2018 (with Konstantin Sonin)

We examine the role of business in determining economic policy in Russia. On the positive side, the macroeconomic policy under Putin has been consistently conservative. Over the years, the efforts of private business people, supported by professionals within the government, have led to some limited reforms and improved the quality of life of Russian people. In 2016, Russians drove more cars over better roads, have access to a far more full specter of financial services, and enjoy more streamlined bureaucratic procedures than they did in 1999. However, we find that the negative side is no less apparent. Russia’s windfall oil revenues financed the formation of a personalized, archaic political regime. Large private businesses have become inseparable from the state administration. Attempts to create better institutions—never particularly effective—have been replaced by a proliferation of ad hoc, individual projects. With political arrangements set up to keep the current leadership in power, and tiny elites busy exploiting connections to the leader to enrich themselves, we find no reason to expect much-needed economic and institutional reforms to come from above.

“Economic Transition and the Rise of Alternative Institutions: Political Connections in Putin’s Russia,” in Economics of Transition, 2018 (with Konstantin Sonin)

The economic transition from socialism has not resulted in the emergence of impersonal, rule-based institutions. Instead, the natural demand for institutions that protect property rights has led to the emergence of inefficient alternative institutions such as that of cronyism, the practice of appointing personal acquaintances of the political leader to key business-related positions. Once the political leader is entrenched in power, he appoints cronies as a competent subordinate is more prone to switching allegiance to a potential challenger. As competence makes a more significant difference in a rule-based environment, such a leader has no interest in any institutional development. Using the novel dataset that covers the Russian business, we find a positive and significant effect of direct connections to the personal circle of President Putin on the wealth of businesspeople. The magnitude of the effect varies at different levels of rents available for redistribution and “network centrality of a businessman”: it is higher during the years of high oil prices, but is attenuated by the prominence of the businessman in the network.

“Putin’s Strategy After the Global Financial Crisis of 2008-9” in Economic Shocks and Authoritarian Stability: Duration, Financial Conditions, and Institutions, 2020 (with Daniel Treisman)

We examine how the Putin regime adjusted its political strategy—in particular, its use of repression, cooptation, censorship, and propaganda—in response to the global economic crisis. We document several phases of such response: emergency management (2009-2011), characterized by cooptation and public spending to offset the pain felt by the population as the economy contracted, and government reallocation of resources to bail out business interests. This phase ended in mass anti-government protests in the streets of Moscow and the realization that, given the moderate pace of economic recovery, the Kremlin would need to conserve and target its reserves. The principal objective of the second phase was to discredit and marginalize the opposition in the urban areas. Propaganda was stepped up, focused on the theme of traditional Russian values. Cooptation now targeted mostly core supporters—in particular, public sector workers—while repression and censorship (of both media and internet) intensified in an attempt to block collective action and break the momentum of protests. The third phase started with an invasion of Crimea. From late 2013, Putin appeared to give up on a revival of rapid growth. Propaganda rose to an unprecedented pitch, focus now being on military conflict more than traditional values. Controls over media and internet were tightened still more, less at this point to disrupt the protest movement, which had, in any case, died away, than to dominate public discourse.

“Information Manipulation and Repression: A Theory and Evidence from the COVID Response in Russia” (with Konstantin Sonin)

Many rules and regulations imposed during the COVID-19 pandemic were decried as an assault on individual freedoms, but were they, actually? In an authoritarian regime, yes. Using cross-regional data from 83 Russian regions and the two-way fixed-effects design, we show that the extent of information manipulation measured by the difference between the excess mortality and the reported COVID-19 deaths, and repression by local authorities such as arrests and detentions for violating lockdown rules were influenced by the strength of the civil society and the opposition share in local parliaments. Furthermore, the heavy-handed tactics come at a price: the misinformation reduced the willingness of citizens to comply with anti-pandemic measures. These findings provide new evidence that authoritarian regimes, which might seem to be well-equipped to implement restrictive measures, are actually ill-suited to deal with public health challenges.