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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- Jakob Klette & Samuel Kortum, 2002.
"Innovating firms and aggregate innovation,"
300, Federal Reserve Bank of Minneapolis.
- 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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"On the Mechanics of Firm Growth,"
2007-4, University of Minnesota, Department of Economics, revised 10 2007.
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2005 Meeting Papers
470, Society for Economic Dynamics.
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Claremont Colleges Working Papers
2000-61, Claremont Colleges.
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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.
- Peter L. Rousseau & Boyan Jovanovic, 2008. "US Investment 1901-2005: Incumbents, Entrants, and Q," 2008 Meeting Papers 696, Society for Economic Dynamics.
- 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.
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