On the creation of networks and knowledge

This paper examines the evolution of networks when innovation takes place as a result of agents bringing together their knowledge endowments. Agents freely form pairs creating a globally stable matching. paired agents combine their existing knowledge to create new knowledge. We study the properties of the dynamic network formed by these interactions, and the resultant knowledge dynamics. Each agent carries an amount of knowledge of a certain type, and the innovative output of a pair is a function of the partners'' endowments and types. We find evidence that the pattern of substitution between quantity and type of knowledge in the innovation function is vital in determining the growth of knowledge, the emergence of expertise and the stability of a number of network structures. Network structure itself exhibits a phase change when the relative importance of diversity compared to quantity increases beyond a threshold value.