Job Market Paper

The Adoption and Diffusion of New Technologies

Abstract: I study how new innovative technologies are diffused through the economy by heterogeneous firms. Firms innovate to improve existing products owned by other firms and become the leading-edge producer. Innovations are relatively more likely to build on products owned by firms using the same technology, creating incomplete innovation spillovers between technologies. Firms invest in R&D to adopt new technologies and invest more when the direct (higher productivity) and indirect (lower competition) benefits of adoption are high. Using patent citation links, I construct a new measure of information-communication technology (ICT) usage that accounts for the application of ICT to new innovations. Empirically, firms issue higher quality patents and experience a period of increased productivity growth following the adoption of ICT. The model is calibrated to match empirical features of ICT diffusion over a transition path that follows a new technology's introduction. Early diffusion is driven by firms adopting the new technology directly while late diffusion is driven by previous adopters growing relatively quickly compared to non-adopters. Growth declines by 10-15% following the introduction of the new technology, despite an increase in long-run growth. This slowdown is caused by a reallocation of R&D activities over the transition path caused by: (1) the indirect benefits of adoption crowding out other forms of innovation; and (2) firms investing less in innovation because of incomplete spillovers. Additional counterfactual experiments highlight the role of firm heterogeneity and the resource allocation for diffusion, growth and welfare.