Spin-offs: theory and evidence

Luis M B Cabral () and Zhu Wang ()

No RWP 08-15, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: We develop a “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-off (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

New Economics Papers: this item is included in nep-bec, nep-com, nep-cta, nep-ent, nep-mic and nep-tid
Date: 2008
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