Knowledge Diffusion through Employee Mobility

In high-tech 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 employers? technological know-how. This paper 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 since 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.