Random walk to innovation: Why productivity follows a power law

In this paper we propose a mechanism generating endogenously the productivity of innovations. We assume that knowledge creation occurs as the innovator obtains new ideas from combinations of existing ideas. The productivity of an innovation is determined by an unobservable intrinsic component as well as by the productivity of the parent ideas and their parents, thus generating a network of spillovers. When the innovator has only local knowledge of the network, his optimal behavior is to ”walk randomly” through the network of ”citations”. The resulting distribution for the productivity of the innovations is shown to be a power law, at least asymptotically. The intuition behind the result is that the innovator focuses his efforts on strengthening local spilovers because he has no command on the other sources of productivity. When this process of innovation is embedded in a model a la Kortum (1997) balanced growth of output is generated.