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Spin-offs and the Market for Ideas

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  • Satyajit Chatterjee
  • Esteban Rossi-Hansberg

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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Bibliographic Info

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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Publication status: published as Satyajit Chatterjee & Esteban Rossi‐Hansberg, 2012. "Spinoffs And The Market For Ideas," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(1), pages 53-93, 02.
Handle: RePEc:nbr:nberwo:13198

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  14. Anton, James J & Yao, Dennis A, 1995. "Start-ups, Spin-offs, and Internal Projects," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 11(2), pages 362-78, October.
  15. Jan Eeckhout, 2004. "Gibrat's Law for (All) Cities," American Economic Review, American Economic Association, American Economic Association, vol. 94(5), pages 1429-1451, December.
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