Idea Diffusion and Property Rights

We study innovation and diffusion of technology at the industry level. We derive an industry's evolution, from birth to its maturity, and we characterize how diffusion affects the incentive to innovate. The model implies that pro­tection of innovators should be only partial due to the matching externality in the meetings in which idea transfers take place. The model also shows that enhancing idea diffusion is socially beneficial and can generate industry over­taking patterns endogenously. We fit the model to the early experiences of the U.S. automobile and personal computer industries and quantify the theoretical predictions.