Spinoffs and the market for ideas

Satyajit Chatterjee () 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.

New Economics Papers: this item is included in nep-com, nep-cta and nep-ent
Date: 2008
View list of references

Downloads: (external link)
http://www.philadelphiafed.org/research-and-data/p ... ers/2008/wp08-26.pdf (application/pdf)

Related works:
Working Paper: Spin-offs and the Market for Ideas (2007)
Working Paper: Spin-offs and the market for ideas (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:fip:fedpwp:08-26

Ordering information: This working paper can be ordered from
http://www.phil.frb.org/econ/wps/index.html

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Philadelphia
Contact information at EDIRC.
Series data maintained by Diane Rosenberger ().