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 congestion externality in the meetings in which idea transfers take place. We fit the model to the early experiences of the automobile and the personal computer industries, both of which show S-shaped growth of the number of firms.