Working Paper

Ideas and Firm Dynamics When It Takes Two to Tango

Abstract: Teams of inventors now produce over 80 percent of U.S. patents, up from just 45 percent in 1976. Over the same period, inventor employment has become increasingly concentrated in large firms, rising six times more than overall employment concentration. To explain these trends, we develop a new model of endogenous team formation within firms and embed it in a general equilibrium model of the inventor labor market. Teams increase firms’ returns to scale by increasing the likelihood of productive matches between inventors. The value of these matches rises over time, possibly driven by increasing knowledge specialization. This causes large firms to expand and small firms to shrink in equilibrium, accounting for the observed increase in inventor employment concentration. Because firms do not internalize knowledge spillovers, there is misallocation of inventors across firms. The rise of team production amplifies this misallocation by a factor of six by reallocating inventors away from small firms that generate disproportionately large knowledge spillovers.

JEL Classification: E23; E24; O31; O32; O33;

https://doi.org/10.21799/frbp.wp.2026.44

Bibliographic Information

Provider: Federal Reserve Bank of Philadelphia

Part of Series: Working Papers

Publication Date: 2026-09-22

Number: 26-44