Spinoffs and the market for ideas

Satyajit Chatterjee (chatterjee.satyajit@gmail.com) and Esteban Rossi-Hansberg

No 08-26, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: We present a theory of spinoffs in which the key ingredient is the originator?s private information concerning the quality of his new idea. Because quality is privately observed, by the standard adverse-selection logic, the market can at best offer a price that reflects the average quality of ideas sold. This gives the holders of above-average-quality ideas the incentive to spin off. We show that only workers with very good ideas decide to spin off, while workers with mediocre ideas sell them. Entrepreneurs of existing firms pay a price for the ideas sold in the market that implies zero expected profits for them. Hence, firms? project selection is independent of firm size, which, under some additional assumptions, leads to scale-independent growth. The entry and growth process of firms leads to invariant firm-size distributions that resemble the ones for the U.S. economy and most of its individual industries.

Date: 2008
New Economics Papers: this item is included in nep-com, nep-cta and nep-ent
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: SPINOFFS AND THE MARKET FOR IDEAS (2012)
Working Paper: Spin-offs and the market for ideas (2007)
Working Paper: Spin-offs and the Market for Ideas (2007)
Working Paper: Spin-offs and the Market for Ideas (2007)
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