Innovation Cycles∗

We embed frictions in the sale of ideas in a relatively standard real business cycle model. Inventors own ideas that they can either inefficiently implement on their own, or implement them efficiently in partnership with firms. However, firms can steal ideas; they are likely to do so if the idea is of sufficiently high quality. Introducing this agency problem in a dynamic general equilibrium model, we show that news about future technologies improve the firms’ commitment ability not to expropriate inventors, and thus to an improvement in the pool of supplied ideas. Our model generates positive comovement of investment, consumption and labor supply in response to news about future technologies. ∗Jiro Kondo is with McGill University. Dimitris Papanikolaou is with Kellogg School of Management and NBER. We thank Larry Christiano, Simon Gilchrist, Arvind Krishnamurthy, Sergio Rebelo and the participants of the Northwestern Macro-Finance lunch for helpful comments and discussions. Dimitris Papanikolaou thanks the Zell Center for Risk and the Jerome Kenney Fund for financial support.