The derived demand for knowledge

This chapter draws attention to the effects of the economic properties of knowledge on its derived demand, an issue that has not received enough attention in the literature. The results of the analysis suggests that, because of the idiosyncratic – Arrovian – properties of knowledge, a chain of effects takes place: i) in downstream markets the price of goods that have been produced using knowledge as an intermediate good falls; ii) consequently the derived demand in upstream knowledge markets – both within corporations and by them to knowledge-intensive business services (KIBS) – has a lower position and, iii) the price of knowledge is lower than it should be were knowledge a standard good traded in competitive markets; iv) this has negative consequences in terms of adverse selection of large-scale, high-quality research projects but, v) possible compensating effects stemming from the use of knowledge spillovers to generate cheaper knowledge. Such results have important implications for economic policy discussions and decisions.