Spin-offs and the Market for Ideas
We 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, at a cost, 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. Therefore, 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, firm growth is scale independent. The entry and growth process of firms in this economy leads to an invariant distribution that resembles the one in the US economy.
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