A crucial feature of the specification used here is that knowledge enters into
production in two distinct ways. A new design enables the production of a new good that
can be used to produce output. A new design also increases the total stock of knowledge,
and thereby increases the productivity of human capital in the research sector. By
assumption, the benefits of from the first productive role for a design are completely
excludable, and the benefits from the second completely nonexcludable. In an overall
sense, this makes new designs nonrival inputs that are partially excludable. The
equilibrium concept used in the analysis that follows is based on the idea that the owner of
a design has property rights over its use in the production of a new producer durable but
not over its use in the research sector. If an inventor has a patented design on widgets, no
one can make or sell widgets without signing a contract with the inventor. On the other
hand, other inventors are free to spend time studying the patent application for the widget.
In so doing, they may learn knowledge that helps in the design of wodgets. The inventor of
the widget has no ability to stop the inventors of wodgets from learning from the design of
a widget