The Rise of General Purpose Technologies

What determines whether a new technology will be adopted by a wide array of sectors throughout the economy, turning it into a General Purpose Technology (GPT)? We build a model of endogenous innovation in a setup with heterogenous sectors. These are connected via input-output linkages, so that the economy is a network of interconnected technologies. When a new input is first adopted by a given sector, its market grows. This in turn provides incentives for product innovation in our quality-ladder model. With rising quality, the effective price of the new input falls, so that it is subsequently adopted by new sectors. This cascade of adoption follows the notion of "technology proximity" - a concept outlined by Helpman and Trajtenberg (1998), which we formalize in our model. The proximity of sectors is given by how closely they are connected via input-output linkages, using a standard measure from network theory. In this way we can assign distances between any two sectors for every year where detailed U.S. input-output tables are available. In line with our model, the speed and extent of diffusion is strongly increasing in technological proximity.