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Spin-offs and the Market for Ideas

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Author Info
Satyajit Chatterjee
Esteban Rossi-Hansberg

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Abstract

We propose a theory of firm dynamics in which workers have ideas for new projects that can be sold in a market to existing firms or implemented in new firms: spin-offs. Workers have private information about the quality of their ideas. Because of an adverse selection problem, workers can sell their ideas to existing firms only at a price that is not contingent on their information. We show that the option to spin off in the future is valuable so only workers with very good ideas decide to spin off and set up a new firm. Since entrepreneurs of existing firms pay a price for the ideas sold in the market that implies zero expected profits for them, firms' project selection is independent of their size, which, under some assumptions, leads to scale-independent growth. The entry and growth process of firms in this economy leads to an invariant distribution that resembles the one in the US economy.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13198.

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Date of creation: Jun 2007
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Handle: RePEc:nbr:nberwo:13198

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Find related papers by JEL classification:
E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
E23 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Production
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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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.:
  1. Prusa, Thomas J & Schmitz, James A, Jr, 1994. "Can Companies Maintain Their Initial Innovation Thrust? A Study of the PC Software Industry," The Review of Economics and Statistics, MIT Press, vol. 76(3), pages 523-40, August. [Downloadable!] (restricted)
  2. S. Klepper & S. Sleeper, 2002. "Entry by Spinoffs," Papers on Economics and Evolution 2002-07, Max Planck Institute of Economics, Evolutionary Economics Group.
  3. 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.
    Other versions:
  4. April Mitchell Franco & Darren Filson, 2000. "Knowledge diffusion through employee mobility," Staff Report 272, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  5. Anton, James J & Yao, Dennis A, 1994. "Expropriation and Inventions: Appropriable Rents in the Absence of Property Rights," American Economic Review, American Economic Association, vol. 84(1), pages 190-209, March. [Downloadable!] (restricted)
  6. Erzo G. J. Luttmer, 2007. "Selection, Growth, and the Size Distribution of Firms," The Quarterly Journal of Economics, MIT Press, vol. 122(3), pages 1103-1144, 08. [Downloadable!] (restricted)
  7. Ericson, Richard & Pakes, Ariel, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Blackwell Publishing, vol. 62(1), pages 53-82, January. [Downloadable!] (restricted)
  8. Jan Eeckhout, 2004. "Gibrat's Law for (All) Cities," American Economic Review, American Economic Association, vol. 94(5), pages 1429-1451, December. [Downloadable!]
  9. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May. [Downloadable!] (restricted)
  10. John Sutton, 1997. "Gibrat's Legacy," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 40-59, March. [Downloadable!] (restricted)
  11. Esteban Rossi-Hansberg & Mark L. J. Wright, 2006. "Establishment size dynamics in the aggregate economy," Staff Report 382, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  12. Xavier Gabaix, 2005. "The Granular Origins of Aggregate Fluctuations," 2005 Meeting Papers 470, Society for Economic Dynamics. [Downloadable!]
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  13. Anton, James J & Yao, Dennis A, 1995. "Start-ups, Spin-offs, and Internal Projects," Journal of Law, Economics and Organization, Oxford University Press, vol. 11(2), pages 362-78, October.
  14. Xavier Gabaix, 1999. "Zipf'S Law For Cities: An Explanation," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 739-767, August. [Downloadable!] (restricted)
  15. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September. [Downloadable!] (restricted)
  16. Erzo G.J. Luttmer, 2007. "On the Mechanics of Firm Growth," Working Papers 2007-4, University of Minnesota, Department of Economics, revised 10 2007. [Downloadable!]
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  17. 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. [Downloadable!] (restricted)
  18. Anton, James J & Yao, Dennis A, 2002. "The Sale of Ideas: Strategic Disclosure, Property Rights, and Contracting," Review of Economic Studies, Blackwell Publishing, vol. 69(3), pages 513-31, July.
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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. Erzo G.J. Luttmer, 2007. "New goods and the size distribution of firms," Working Papers 649, Federal Reserve Bank of Minneapolis. [Downloadable!]
  2. Boyan Jovanovic, 2007. "Investment Options and the Business Cycle," NBER Working Papers 13307, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Erzo G.J. Luttmer, 2008. "On the mechanics of firm growth," Working Papers 657, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  4. Luis Cabral & Zhu Wang, 2009. "Spin-offs: theory and evidence," Research Working Paper RWP 08-15, Federal Reserve Bank of Kansas City. [Downloadable!]
  5. Robert E. Lucas, Jr., 2008. "Ideas and Growth," NBER Working Papers 14133, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
    • Robert E. Lucas, 2009. "Ideas and Growth," Economica, London School of Economics and Political Science, vol. 76(301), pages 1-19, 02. [Downloadable!] (restricted)
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