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Financial Innovation in the Twenty-First Century: Evidence from US Patents

We explore the evolution of financial innovation using US finance patents. Patented financial innovations are substantial and increasingly economically important. Their subject matter has changed, consistent with the industry’s shift toward household investors and borrowers. Information technology (IT) and other nonfinancial firms drove the surge in financial patenting. The location of innovation shifted, with banks moving activity away from states with tight financial regulation and high-tech regions attracting innovation by payments, IT, and nonfinancial firms. Analyses of returns suggest that the social value of these innovations is higher than their private value. We present a simple model to explain these trends.