Knowledge spillovers in competitive search equilibrium

Espen Moen ()

No 913, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: Do firms have the right incentives to innovate in the presence of spillovers? This paper proposes an explicit channel of spillovers through labor flows within a framework of competitive search. Firms can choose to innovate or to imitate by hiring a worker from a firm that has already innovated. We show that with long-term wage contracts information spillovers caused by worker turnover are efficiently internalized. If innovating firms cannot commit to long-term wage contracts, there is too little innovation and too much imitation. A combination of a subsidy to innovation and a fee to imitation can restore efficiency. A stand-alone subsidy of innovating firms will also improve efficency. A fee on imitation has ambigous welfare effects, although it reduces imitation it also reduces innovation. Restrictions on labor mobility reduces welfare.

Date: 2012
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