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Abstract

Knowledge and experience learned from investing in physical, tangible capital is sometimes non-excludable between firms. I explore how this simple externality affects technological growth. Using the recent fracking revolution in American oil & gas, I develop a two-stage empirical procedure to 1) provide evidence that this shared intangible exists and 2) show that firms value this knowledge externality when making investment decisions. I use a spatial panel model that is a natural network structure for localized knowledge diffusion to identify cross-sectional differences in intangible capital value across counties. Then, I use global oil prices as a plausibly exogenous source of variation in investment levels. I find that one extra investment made by other firms in strong knowledge network areas is associated with a 13% increase in monthly productivity. I show that this effect is particularly important for growing technologies; tests using older methods of production do not have the same impact. In a heterogeneous firm model, I formalize how this mechanism drives growth cycles by effecting technology improvement and widespread adoption jointly. As more firms learn by doing, the technology improves for everyone. As the technology improves, more firms invest. Technology transition is the result of firms optimally re-weighting their capital portfolios towards newer technology. Because tangible capital investment is the primary mechanism for technology growth, the distribution of firms in the economy becomes an important state variable which determines the rate of technology adoption and the phase-out of old technology.

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