Quality Adjustment in Industry Deflators Strengthens Estimated Innovation–Productivity Relationships

Atalay, Enghin; Hortacsu, Ali; Kimmel, Nicole; Syverson, Chad

doi:10.21799/frbp.wp.2026.22

Working Paper

Quality Adjustment in Industry Deflators Strengthens Estimated Innovation–Productivity Relationships

Abstract: How do investments in innovation translate into future productivity growth? Empirically answering this question is challenging. R&D spending is an observed input into the innovation process, but mapping it to productivity growth requires assumptions about the depreciation of R&D capital, gestation lags, and how well such expenditures capture true innovative effort (Hall, 2007). Patents, an alternative measure, capture successful innovations but vary widely in novelty (Kelly et al., 2021) and economic value (Kogan et al., 2017). Firms may forgo patenting to preserve secrecy, while others patent strategically to protect existing products even when their underlying innovations are marginal.

JEL Classification: D24; E31; O31; O47;

https://doi.org/10.21799/frbp.wp.2026.22