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Optimal Project Rejection and New Firm Start-Ups

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Author Info
Cassiman, Bruno
Ueda, Masako

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Abstract

Entrants are typically found to be more innovative than incumbent firms. Furthermore, these innovative ideas often originate with established firms in the industry. Therefore, the established firm and the start-up firm seem to select different types of projects. We claim that this is the consequence of their optimal project allocation mechanism, which depends on their comparative advantage. The start-up firm may seem more ‘innovative’ than the established firm may because the comparative advantage of the start-up firm is to commercialize ‘innovative’ projects, i.e. projects that do not fit with the established firms’ existing assets. Our model integrates various facts found in the industrial organization literature about the entry rate, firm focus, firm growth, industry growth and innovation. We also obtain some counter-intuitive results such that a reduction in the cost of start-ups may actually slow down start-ups and that the firm may voluntarily give away the property rights to the inventions discovered within the firm.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3429.

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Date of creation: Jun 2002
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Handle: RePEc:cpr:ceprdp:3429

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Related research
Keywords: new firm start-ups project selection real option

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Find related papers by JEL classification:
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Andres Almazan & Javier Suarez & Sheridan Titman, 2007. "Firms' Stakeholders and the Costs of Transparency," NBER Working Papers 13647, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Motta, Massimo & Rønde, Thomas, 2002. "Trade secret laws, labor mobility, and innovations," Working Papers 08-2002, Copenhagen Business School, Department of Economics. [Downloadable!]
    Other versions:
  3. Palomeras, Neus, 2003. "Sleeping patents: any reason to wake up?," IESE Research Papers D/506, IESE Business School. [Downloadable!]
  4. Peter Thompson & Steven Klepper, 2006. "Intra-Industry Spinoffs," Working Papers 0605, Florida International University, Department of Economics. [Downloadable!]
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