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

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  • Cabral, Luis
  • Wang, Zhu

Abstract

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

Suggested Citation

  • Cabral, Luis & Wang, Zhu, 2008. "Spin-offs: theory and evidence from the early U.S. automobile industry," Research Working Paper RWP 08-15, Federal Reserve Bank of Kansas City, revised 01 Jul 2009.
  • Handle: RePEc:fip:fedkrw:rwp08-15
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    1. April Mitchell Franco & Darren Filson, 2000. "Knowledge Diffusion through Employee Mobility," Claremont Colleges Working Papers 2000-61, Claremont Colleges.
    2. 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.
    3. 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, February.
    4. Timothy Dunne & Mark J. Roberts & Larry Samuelson, 1988. "Patterns of Firm Entry and Exit in U.S. Manufacturing Industries," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 495-515, Winter.
    5. repec:rje:randje:v:37:y:2006:i:4:p:841-860 is not listed on IDEAS
    6. 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, September.
    7. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-670, May.
    8. 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.
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    Cited by:

    1. Fackler, Daniel & Schnabel, Claus, 2013. "Survival of spinoffs and other startups: First evidence for the private sector in Germany, 1976-2008," Discussion Papers 84, Friedrich-Alexander University Erlangen-Nuremberg, Chair of Labour and Regional Economics.
    2. Luis Cabral & Zhu Wang & Daniel Yi Xu, 2018. "Competitor, Complementors, Parents and Places: Explaining Regional Agglomeration in the U.S. Auto Industry," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 1-29, October.
    3. Muendler, Marc-Andreas & Rauch, James E. & Tocoian, Oana, 2012. "Employee spinoffs and other entrants: Stylized facts from Brazil," International Journal of Industrial Organization, Elsevier, vol. 30(5), pages 447-458.
    4. Helmut Fryges & Bettina Müller & Michaela Niefert, 2014. "Job machine, think tank, or both: what makes corporate spin-offs different?," Small Business Economics, Springer, vol. 43(2), pages 369-391, August.
    5. Christian Cordes & Peter Richerson & Georg Schwesinger, 2014. "A corporation’s culture as an impetus for spinoffs and a driving force of industry evolution," Journal of Evolutionary Economics, Springer, vol. 24(3), pages 689-712, July.
    6. Peter Thompson & Jing Chen, 2011. "Disagreements, employee spinoffs and the choice of technology," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(3), pages 455-474, July.
    7. Rocha, Vera & Carneiro, Anabela & Varum, Celeste, 2015. "What explains the survival gap of pushed and pulled corporate spin-offs?," Economics Letters, Elsevier, vol. 126(C), pages 127-130.

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