Innovation and reciprocal externalities: information transmission via job mobility

The phenomenon of "job-hopping", frequent in environments such as Silicon Valley, challenges firms' ability to protect their proprietary information. This paper presents a two-period model of a competitive industry where workers may capitalize on information acquired on the job by migrating to rival firms. Equilibrium is characterized by levels of R&D investment and job mobility. Several intriguing results are specified. First, higher mobility generally corresponds to greater overall technological progress. Furthermore, the equilibrium rate of job mobility never exceeds the socially efficient rate. Finally, due to the existence of opposing external effects, an efficient outcome can be approximated despite apparent incentive problems. The paper suggests that contractual clauses intended to restrict mobility act as a double-edged sword. While helping firms protect research investments, they also prevent the exchange of workers when such exchanges are both individually and socially beneficial (C) 2001 Elsevier Science B.V All rights reserved.