Essays on the Incentives for Innovation and Voluntary Knowledge Transfer

In the following essays I study the determinants of firms' incentives to innovate and voluntarily transfer knowledge to other firms. Technology licensing and inventor job transitions are two examples of knowledge diffusion that takes place voluntarily between firms in a market. In this context, the incidence of transfer will depend on product market competition. I ask how changes in intellectual property policies affect voluntary knowledge transfer and innovation across different degrees of product substitutability. I also investigate the empirical relationship between the incidence of knowledge transfer and substitutability.In the first chapter, I use a two-stage duopoly game of innovation and knowledge transfer to show that innovator bargaining power determines the relationship of innovation to the substitutability of the competitors' products. In particular, innovation increases in substitutability when the innovator's bargaining power is low. In such a situation, the model predicts that the incidence of knowledge transfer will first rise and then fall as a function of substitutability. I show that these results hold in an environment of nested CES demand and price competition.In the second chapter, I find that the predicted non-monotonic pattern of knowledge transfer holds empirically between pairs of firms. A rising-then-falling relationship exists in the incidence of both technology licensing deals and inventor job transitions as a function of firms' bilateral product market overlap. I find this relationship between knowledge transfer and market overlap after controlling for bilateral technological overlap. This finding isolates the strategic competitive determinants of knowledge transfer and shows that they are economically significant. The results also constitute indirect evidence for the existence of compensation mechanisms that internalize the knowledge spillovers from R&D worker job mobility.In the third chapter, I find that an infinite-horizon dynamic duopoly game confirms the non-monotonic empirical pattern at low innovator bargaining power. I use the dynamic model to show that greater bargaining power positively impacts the output growth rate through increased innovation. However, raising the bargaining power also generates a countervailing shift away from neck and neck innovation; this shift has a negative impact on growth and the net result is ambiguous