From Knowledge to Ideas: The Two Faces of Innovation
44 Pages Posted: 28 Oct 2010 Last revised: 31 Aug 2012
Date Written: March 1, 2011
Innovative ideas have unique properties arising from low communication costs. But ideas come from knowledge that is costly to communicate. “Formalizing” knowledge — codifying, developing standards, etc. — reduces these costs. In a simple model, formalization is associated with changes in the nature of competition between two equilibrium regimes. In one, knowledge is formalized, new technology replaces old and patents increase innovation incentives. In the other, knowledge is not formalized, old technology coexists with new, patents decrease innovation incentives and firms sometimes freely exchange knowledge. The equilibrium changes as technology improves over a life-cycle, affecting firm strategy, innovation policy, geographic localization and more.
Keywords: technology, knowledge, diffusion, spillovers, human capital, information good
JEL Classification: O3, D83, L1
Suggested Citation: Suggested Citation