We study the innovation and diffusion of technology at the industry level. We derive the full dynamic paths of an industry’s evolution, from birth to its maturity, and we characterize the impact of diffusion on the incentive to innovate. The model implies that protection of innovators should be only partial due to the congestion externality in meetings in which idea transfers take place. We fit the model to the early experiences of the automobile and personal computer industries both of which show an S-shaped growth of the number of firms.
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