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Spin-offs and the Market for Ideas

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  • Esteban Rossi-Hansberg

    (Princeton University)

  • Satyajit Chatterjee

    (Federal Reserve Bank of Philadelphia)

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, at a cost, 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. Therefore, 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, firm growth is scale independent. 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 Society for Economic Dynamics in its series 2007 Meeting Papers with number 86.

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Date of creation: 2007
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Handle: RePEc:red:sed007:86

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References

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  1. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
  2. Erzo G. J. Luttmer, 2011. "On the Mechanics of Firm Growth," Review of Economic Studies, Oxford University Press, vol. 78(3), pages 1042-1068.
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  5. April Mitchell Franco & Darren Filson, 2000. "Knowledge diffusion through employee mobility," Staff Report 272, Federal Reserve Bank of Minneapolis.
  6. Anton, James J & Yao, Dennis A, 2002. "The Sale of Ideas: Strategic Disclosure, Property Rights, and Contracting," Review of Economic Studies, Wiley Blackwell, vol. 69(3), pages 513-31, July.
  7. Esteban Rossi-Hansberg & Mark L. J. Wright, 2006. "Establishment size dynamics in the aggregate economy," Staff Report 382, Federal Reserve Bank of Minneapolis.
  8. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
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  12. 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.
  13. 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.
  14. 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.
  15. Xavier Gabaix, 2009. "The Granular Origins of Aggregate Fluctuations," NBER Working Papers 15286, National Bureau of Economic Research, Inc.
  16. Ericson, Richard & Pakes, Ariel, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Wiley Blackwell, vol. 62(1), pages 53-82, January.
  17. Peter L. Rousseau & Boyan Jovanovic, 2008. "US Investment 1901-2005: Incumbents, Entrants, and Q," 2008 Meeting Papers 696, Society for Economic Dynamics.
  18. Xavier Gabaix, 1999. "Zipf'S Law For Cities: An Explanation," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 739-767, August.
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