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Incentives and Option Value in the Silicon-Valley Tournament Game (Revised)

  • Masahiko Aoki
  • Hirokazu Takizawa

This paper analyzes the ``Silicon Valley model'' as a novel economic institution in the domain of technological product system innovation such as computers. We focus on the information structural relationship as well as governance relationships between venture capitalists and a cluster of entrepreneurial firms. The informational conditions under which the Silicon Valley model is efficient are identified, leading to understanding the significance of standardization of interfaces, modularization and information encapsulation. We then examine the governance/incentive aspect of the model by integrating the models by Aoki(2001)and Baldwin and Clark(2000)to give comparative statics results regarding the optimal number of entrepreneurial firms competing in the same component product. The analyses enable us to evaluate the applicability of the model beyond specific localities and industries.

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Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 02001.

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Length: 38 pages
Date of creation: Feb 2002
Date of revision:
Handle: RePEc:eti:dpaper:02001
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  1. Milgrom, Paul & Roberts, John, 1995. "Complementarities and fit strategy, structure, and organizational change in manufacturing," Journal of Accounting and Economics, Elsevier, vol. 19(2-3), pages 179-208, April.
  2. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers 495, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Raghuram G. Rajan & Luigi Zingales, 1997. "Power in a Theory of the Firm," NBER Working Papers 6274, National Bureau of Economic Research, Inc.
  4. Gompers, Paul & Lerner, Josh, 1996. "The Use of Covenants: An Empirical Analysis of Venture Partnership Agreements," Journal of Law and Economics, University of Chicago Press, vol. 39(2), pages 463-98, October.
  5. Kaplan, Steven & Strömberg, Per Johan, 2000. "Financial Contracting Theory Meets The Real World: An Empirical Analysis Of Venture Capital Contracts," CEPR Discussion Papers 2421, C.E.P.R. Discussion Papers.
  6. Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers 70, C.E.P.R. Discussion Papers.
  7. repec:oup:qjecon:v:113:y:1998:i:2:p:387-432 is not listed on IDEAS
  8. Prat, Andrea, 1996. "Shared Knowledge vs Diversified Knowledge in Teams," Journal of the Japanese and International Economies, Elsevier, vol. 10(2), pages 181-195, June.
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