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From Knowledge to Ideas: The Two Faces of Innovation

44 Pages Posted: 28 Oct 2010 Last revised: 31 Aug 2012

James E. Bessen

Boston University - School of Law; Research on Innovation

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

Bessen, James E., From Knowledge to Ideas: The Two Faces of Innovation (March 1, 2011). Boston Univ. School of Law Working Paper No. 10-35. Available at SSRN: or

James E. Bessen (Contact Author)

Boston University - School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States

Research on Innovation ( email )

202 High Head Rd.
Harpswell, ME 04079
United States
617-531-2092 (Phone)

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