In this paper, I analyze the relationship between innovativeness and cartelization in Germany in the period between 1924 and 1932. At that time, cartel contracts were legal and enforceable in court. Managers and politicians both promoted cartel agreements in order to stabilize prices and to avoid a ruinous competition among firms. Therefore, the German economy was highly cartelized. However, the degree of cartelization varied heavily across different industrial sectors, ranging from complete market control to markets where no or only weak cartels existed.
My empirical analysis is based on a novel firm-level dataset. By using a linear cross-sectional regression model, I show that there is a significantly negative correlation between innovativeness, measured by the number of high-value patents granted, and the degree of cartelization on the respective relevant market. I argue that cartels stabilized corporate profits such that managers had on average fewer incentives to finance risky investments in R&D. In addition, the empirical analysis shows that there is evidence for a positive effect of diversification on innovativeness.