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Spinoffs and the market for ideas

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  • Satyajit Chatterjee
  • Esteban Rossi-Hansberg

Abstract

We present a theory of spinoffs in which the key ingredient is the originator’s private information concerning the quality of his new idea. Because quality is privately observed, by the standard adverse-selection logic, the market can at best offer a price that reflects the average quality of ideas sold. This gives the holders of above-average-quality ideas the incentive to spin off. We show that only workers with very good ideas decide to spin off, while workers with mediocre ideas sell them. Entrepreneurs of existing firms pay a price for the ideas sold in the market that implies zero expected profits for them. Hence, firms’ project selection is independent of firm size, which, under some additional assumptions, leads to scale-independent growth. The entry and growth process of firms leads to invariant firm-size distributions that resemble the ones for the U.S. economy and most of its individual industries.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 08-26.

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Date of creation: 2008
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Handle: RePEc:fip:fedpwp:08-26

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  1. Tor Jakob Klette & Samuel Kortum, 2004. "Innovating Firms and Aggregate Innovation," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 986-1018, October.
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  8. April Mitchell Franco & Darren Filson, 2000. "Knowledge diffusion through employee mobility," Staff Report 272, Federal Reserve Bank of Minneapolis.
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  15. Robert E. Hall & Susan E. Woodward, 2007. "The Incentives to Start New Companies: Evidence from Venture Capital," NBER Working Papers 13056, National Bureau of Economic Research, Inc.
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