WHY REMOTE WORK COULD LEAD TO LESS INNOVATION

Do chance encounters among employees of different Silicon Valley companies in coffee shops, restaurants and other public places lead to innovation? The answer is yes, say researchers who examined such “knowledge spillovers” in a study that may have implications for today’s work-from-home culture.

The researchers—Keith Chen of the University of California, Los Angeles, and David Atkin and Anton Popov of the Massachusetts Institute of Technology—tracked the locations of 425,000 phones using commercially available cellphone-location data. Though the data is anonymous and linked only to the unique ID number of each phone, the researchers surmised where the phone owners worked by looking at where the phones spent large parts of the workday, using a map of buildings occupied by Silicon Valley companies that have filed patents.

Examining instances where phone owners went outside the office and ended up near someone from another Silicon Valley company, they found 218 million episodes in which two workers from different companies were in the same place between September 2016 and November 2017.

For their study, they considered only situations in which both people were near each other for at least a half-hour, and used a probability technique to eliminate meetings that might have been arranged in advance. They also assumed that many of these people bumped into someone they already knew, such as a former colleague.

Sharing knowledge

Such chance meetings “may spark a conversation that leads to a transfer of knowledge or a collaboration,” the researchers wrote.

Next, the research team pulled up patent applications filed by the companies of the employees. Such applications list relevant patents from other companies in so-called patent citations. Patent citations are “one measure of which firms are influencing each other and how firms are sharing ideas,” says Prof. Chen, who studies behavioral economics and strategy at UCLA’s Anderson School of Management.

The researchers then worked backward in time. They looked for places where employees of a patent-filing company may have crossed paths with workers from companies cited in the patent application.

“We rewind the clock to a year before when they would have been developing this technology,” says Prof. Chen. “What school were they dropping their kids off at, what mall were they shopping at, what bar do they frequent. And you infer who was at that bar when they were there,” based on the phone-location data.

The goal, Prof. Chen says, is “to connect workers of the firm that is going to file the patent, at the establishment where we infer that patent was innovated, with what other workers they were interacting with.”

Next, the researchers calculated the overall number of such citations that appear to have been linked to unplanned encounters. The upshot: The researchers say that without these encounters, there would have been about 8% fewer cross-firm patent citations in the period covered by the phone-location data.

“There is a tremendous correlation between my workers’ meeting a lot with your workers, and my workers’ citing your workers’ patent,” says Prof. Chen.

The innovation boost from the encounters, by the team’s calculations, is about twice as large as a similar effect found by other research that looked for knowledge transfer based on whether two companies’ offices are near each other, Prof. Chen says.

Their study comes with some caveats. The researchers don’t know whether these employees actually spoke when they were in the same location, or, if they spoke, what they talked about. And they don’t know whether the workers’ jobs would have facilitated a tech discussion—they might have involved a Google HR staffer and an Apple maintenance person.

Still, the report shines a light on what some experts have long suspected: that random conversations involving people in similar industries can increase innovation.

Enrico Moretti, an economics professor at the University of California, Berkeley, says the study “significantly advances our understanding of knowledge spillovers and how they shape the geography of innovation.” Prof. Moretti, who says he has been working on the topic for 25 years, says, “I find this paper to be one of the most direct and convincing pieces of evidence on this question. It provides important insights into why Silicon Valley-style clusters of innovation exist.”

Remote work’s impact

Though the study involved cellphone data from before Covid, the researchers say it has implications for an era when many people work all or part of the time from home.

The researchers looked at people who occasionally worked from home in the study period, based on where their phones were located during daytime hours, and then at how that affected their probability of attending planned or serendipitous meetings with someone from another company who didn’t work from home, Prof. Chen says.

Looking at two hypothetical companies, the researchers extrapolated that if one-half of employees at each business work from home, their meetings of all types—serendipitous and planned—would fall 35% and patent citations between the companies would decline almost 12%.

“We think this means information exchange between firms is decreasing,” Prof. Chen says. “It is worrying. These businesses co-locate for a reason. If they can’t learn from each other, we think that is a big deal.”

“Presumably,” he adds, “an even bigger effect is the harm that it does to serendipity and flow of information and innovation within the firm.”

Happy is the family whose members—parents, grandparents and grown children—trust each other enough to cooperate on shared goals, especially financial ones. When that is truly the case, Uncle Sam’s tax rules can help as well.

This matters especially now that mortgage rates are above 7%, and many families are looking for ways to help younger members. If the elders have resources and are confident younger ones can cooperate, a family loan could make homeownership possible while providing the elders with a useful income stream.

Other strategies can actually lower taxes, such as when funding 529 plans or Roth IRAs, or when someone inherits a traditional IRA with required withdrawals larger than they will need.

Here are three strategies useful for functional families.

Intrafamily loans

It is perfectly legal for families to lend money to a relative for a down payment or even a private mortgage.

But it is important not to cut corners, says Ryan McKeown, a CPA with Modern Wealth Enhancement in Minnesota. If the loan is for a down payment, be honest with the mortgage provider and have a formal agreement. The lender owes tax on the interest payments received.

If the loan is for a private mortgage, both sides should have legal representation with a formal written agreement, including payment terms. The lender owes tax on the interest, and the borrower often can deduct it if he or she itemizes.

To avoid IRS trouble, the interest rate shouldn’t be lower than the agency’s Applicable Federal Rate at the time of the loan. Currently that is about 5% for loans longer than nine years; about 4.5% for loans three to nine years; and about 4% for loans three years or less. Currently, traditional mortgage rates are generally above 7%.

In addition, the lender could use the $19,000 annual gift-tax exemption (described below) to forgive some or all of the interest or principal annually. If both lenders and borrowers are married, that is up to $76,000 a year. There is no tax for the borrower on such forgiveness, because it is from a gift.

If you’re going this route, McKeown advises against having a fixed plan to forgive the debt. Instead, do it in one-off letters specifying the amount—and keep careful records. Otherwise the IRS might try to treat the loan as a taxable gift.

Asset gifts

Powerful tax-saving moves for families often use gift-tax provisions. Under current law, anyone can give anyone else up to $19,000 of assets annually, free of gift tax. That means a married couple with three grandchildren could give them a total of $114,000 in 2026.

The gifts can be cash or other assets, like stock. For noncash gifts, the cost basis—which is the starting point for measuring taxable gain after a sale—“carries over” to the recipient. So if someone buys $1,000 of stock and gives it away when it is worth $5,000, the recipient’s cost basis is $1,000. If the recipient later sells the shares for $8,000, the taxable gain is $7,000.

Here’s an example showing how gifts could save a family taxes. Grandma is a widow of modest means, while her child and spouse have prospered. The couple has two children, and they want to contribute $5,000 to a 529 college-savings plan for each—but they need to sell stock to do it. Their tax rate on the sale would be 18.8%, and they would need to sell about $11,000 of stock.

However, Grandma’s federal tax rate on the stock sale is 0%. If the couple gives $10,000 of shares to Grandma, she could sell them, pay no tax, and fund the grandchildren’s 529 plans. This saves about $1,000 of tax.

These moves are legal, and they could be used in other ways, such as to help a young person fund a Roth IRA.

But trust among family members is essential: Under the law, givers can’t put conditions on a gift. Grandma could use her stock proceeds to take a cruise, but she makes 529 contributions instead.

Mark Sellner, a retired tax attorney and CPA living in Sarasota, Fla., uses this strategy. His children sell stock he gives them and fund 529 plans for his grandchildren.

The family’s tax savings aren’t huge, but he likes other benefits. The sales by his children don’t boost his adjusted gross income, which in turn could raise his Medicare Irmaa premiums or his 3.8% surtax on net investment income.

Sellner doesn’t worry about his children using the funds for another purpose.

“There can’t be any strings attached to gifts. Of course, it is up to us to decide whether to make them in the future,” he says.

Two caveats: The “kiddie tax” applies to most children under age 24, and it is levied at the parents’ rate on investment income above $2,700 in 2026. Consider this before making gifts to a young person.

Investors who give away stock also forgo the step-up, an important provision that exempts assets held at death from capital-gains tax.

Sellner knows he’s losing a step-up, but says, “The children could use a little more now. Why should they wait 20 years to get it?”

Disclaimers

A disclaimer is a highly useful strategy in which one heir renounces an inheritance in favor of another heir. Assuming family members cooperate, this can save taxes.

Here’s one example. Dad died and had a large traditional IRA that he left to Mom. She has enough assets and income to cover her expenses, and she lives in a state with a stiff estate tax. The inherited IRA would put her estate over the threshold.

Also surviving are three young-adult children. If Mom disclaims all or part of Dad’s IRA within nine months of his death, that amount could go directly to the children. They will have 10 years to empty the account, and the family as a whole will likely save estate and income taxes.

Disclaimers have many key details, especially regarding beneficiary documents. Although heirs have great freedom in choosing what assets to disclaim, the rules about who gets disclaimed property are rigid. It is best if the original owner names tiers of heirs so that if one disclaims, the next recipient is clear.