Spin-offs and the market for ideas
The authors 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. The authors 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 U.S. economy.
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References listed on IDEAS
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- Tor Jakob Klette & Samuel Kortum, 2002.
"Innovating Firms and Aggregate Innovation,"
NBER Working Papers
8819, National Bureau of Economic Research, Inc.
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- Klette, Tor Jakob & Kortum, Samuel S, 2002. "Innovating Firms and Aggregate Innovation," CEPR Discussion Papers 3248, C.E.P.R. Discussion Papers.
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Oxford University Press, vol. 78(3), pages 1042-1068.
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- Erzo G.J. Luttmer, 2007. "On the Mechanics of Firm Growth," Working Papers 2007-4, University of Minnesota, Department of Economics, revised 10 2007.
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"The Granular Origins of Aggregate Fluctuations,"
2005 Meeting Papers
470, Society for Economic Dynamics.
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"Establishment Size Dynamics in the Aggregate Economy,"
American Economic Review,
American Economic Association, vol. 97(5), pages 1639-1666, December.
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INFORMS, vol. 51(8), pages 1291-1306, August.
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- Jan Eeckhout, 2004. "Gibrat's Law for (All) Cities," American Economic Review, American Economic Association, vol. 94(5), pages 1429-1451, December.
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- Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
- Peter L. Rousseau & Boyan Jovanovic, 2008. "US Investment 1901-2005: Incumbents, Entrants, and Q," 2008 Meeting Papers 696, Society for Economic Dynamics.
- April Mitchell Franco & Darren Filson, 2000.
"Knowledge diffusion through employee mobility,"
272, Federal Reserve Bank of Minneapolis.
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