Ideas and Firm Dynamics When it Takes Two to Tango

Teams of inventors, rather than inventors working alone, now produce most (80%) of U.S. patents, compared to just 45% in 1976. Over the same period, employment concentration of inventors at large firms has risen six times faster than overall employment concentration. To explain these patterns, we build a model of team formation within the firm and embed it in a general equilibrium model of the inventor labor market. An increase in the relative productivity of teams compared to solo inventors raises the firm's returns to scale in inventor labor by exploiting collaborations across employees. Estimating this model on the patenting output and inventor employment of all patenting firms in the U.S. reveals that a rise in team productivity can explain a large share of inventor employment concentration. Knowledge spillovers across firms, which are important in the innovation context, imply that the allocation of inventors to firms is not necessarily efficient. In the presence of  spillovers, the rise of teams exacerbates misallocation by reducing the size of small firms, which tend to have high knowledge spillovers.