Diffusing New Technology Without Dissipating Rents: Some historical case studies of knowledge sharing

The diffusion of innovations is supposed to dissipate inventors’ rents. Yet in many documented cases, inventors freely shared knowledge with rivals, including in steam engines, iron and steel production and textile machinery. Using a model and case studies, this paper explores why sharing did not eliminate inventors’ incentives. Each new technology coexisted with an alternative for one or more decades. This allowed inventors to earn high rents while sharing knowledge, making major productivity gains. In contrast, patents generated little value. The technology diffusion literature suggests that such circumstances are common during the early stages of a technology. This has important implications for innovation policy.