Knowledge Spillovers in Competitive Search Equilibrium

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 effi ciently 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 effi ciency. A stand-alone subsidy of innovating firms will also improve effi cency. A fee on imitation has ambigous welfare effects, although it reduces imitation it also reduces innovation. Restrictions on labor mobility reduces welfare.