Spin-outs: knowledge diffusion through employee mobility

In many industries, one important method of diffusion is through employee mobility: many of the entering firms are started by employees from incumbent firms using some of their former employer's technological know-how. This article explores the effect of incorporating this mechanism in a general industry framework by allowing employees to imitate their employers' know-how. The equilibrium is Pareto optimal because the employees “pay” for the possibility of learning their employers' know-how. The model's implications are consistent with data from the rigid disk drive industry. These implications concern the effects of know-how on firm formation and survival.