Diffused Errors along Technology Spillovers : Evidence from the 510(k) Medical Device Market

With the diffusion of new technologies, technical errors may pass down to subsequent inventions and create negative externalities. Using predicate lists in the 510(k) premarket notification program, we track the knowledge flows in medical devices that claim the equivalence between existing medical devices (the predicates) and newly approved ones. To examine the pass-down of technical errors, we compare a recalled device to its unrecalled 'sibling' that shares the same unrecalled predicate as a common technical source. We find that follow-on devices that have the recalled device as a predicate are more likely to be recalled than those that have its sibling as a predicate. Such a relation is more pronounced when the recall is a high-risk recall and when the recalled device’s manufacturer is also the manufacturer of the follow-on devices. While diffused errors within firms negatively influence stock market valuation, revenue growth, and inventions, they also create market and invention opportunities across firms