Idea Diffusion and Property Rights (Revised February 2025)

We study the innovation and diffusion of technology at the industry level. We derive an industry's transition from birth to maturity, and we characterize how diffusion affects the incentive to innovate. Socially optimal compensation for innovators should internalize industry-level learning and matching externalities, and we find the compensation should be higher if imitators are allowed to resell ideas. Our model also shows that enhancing idea diffusion is socially beneficial and can generate industry overtaking patterns endogenously. We apply the model to the early histories of the U.S. automobile and personal computer industries and quantify the theoretical predictions.