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Spin-offs: theory and evidence from the early U.S. automobile industry

  • Luis Cabral
  • Zhu Wang

We develop "passive learning" model of firm entry by spin-off : firm employees leave their employer and create a new firm when (a) they learn they are good entrepreneurs (type I spin-offs) or (b) they learn their employer's prospects are bad (type II spin-offs). Our theory predicts a high correlation between spin-offs and parent exit, especially when the parent is a low-productivity firm. This correlation may correspond to two types of causality: spin-off causes firm exit (type I spin-offs) and firm exit causes spin-offs (type II spin-offs). We test and confirm this and other model predictions on a unique data set of the U.S. automobile industry. Finally, we discuss policy implications regarding "covenant not to compete" laws. ; Also issued as a Payments System Research Working Paper

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Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 08-15.

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Date of creation: 2009
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Handle: RePEc:fip:fedkrw:rwp08-15
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  1. Satyajit Chatterjee & Esteban Rossi-Hansberg, 2007. "Spin-offs and the market for ideas," Working Papers 07-15, Federal Reserve Bank of Philadelphia.
  2. April M. Franco & Matthew F. Mitchell, 2008. "Covenants not to Compete, Labor Mobility, and Industry Dynamics," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(3), pages 581-606, 09.
  3. repec:rje:randje:v:37:y:2006:i:4:p:841-860 is not listed on IDEAS
  4. Steven Klepper, 2002. "The capabilities of new firms and the evolution of the US automobile industry," Industrial and Corporate Change, Oxford University Press, vol. 11(4), pages 645-666, August.
  5. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  6. Dunne, T. & Roberts, M.J. & Samuelson, L., 1988. "Pattenrs Of Firm Entry And Exit In U.S. Manufacturing Industries," Papers 1-88-2, Pennsylvania State - Department of Economics.
  7. April Mitchell Franco & Darren Filson, 2006. "Spin‐outs: knowledge diffusion through employee mobility," RAND Journal of Economics, RAND Corporation, vol. 37(4), pages 841-860, December.
  8. April Mitchell Franco & Darren Filson, 2000. "Knowledge Diffusion through Employee Mobility," Claremont Colleges Working Papers 2000-61, Claremont Colleges.
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