The effect of American industry deregulation on firm innovation behaviors: a difference in differences approach

Gao, Cong
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University of Delaware
I exploit American economic deregulation in the entertainment, petroleum and natural gas, utilities, telecommunications and transportation industries to examine how the innovation activities of firms in these five industries changed following deregulation. By using a difference-in-differences method and using number of patents filed by firms through 1967-2004 as a proxy for innovation behavior, I find evidence that, in aggregate, following deregulation, the number of patents filed by firms in the five deregulated industries examined decline from 13.3% to17.3% in the subsequent one to five years after deregulation. Deregulation solely led to a 19.4% decline in innovation behavior, while the net increasing competition decreased innovation by 4.5%. Therefore, the results of this paper enrich current economic and corporate finance literatures by providing evidence of the effects of economic deregulation and show that economic deregulation has a negative effect on innovation activities of firms in the five deregulated industries. A further industry-by-industry analysis finds that, following deregulation, the innovation activity pattern of the petroleum and natural gas industries is different from the activity pattern of other four industries. This result sheds light on the real effects of economic deregulation 40 years after the deregulation process began.