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Signaling, reputation and spinoffs

Suraj Shekhar ()

Journal of Economic Behavior & Organization, 2018, vol. 149, issue C, 88-105

Abstract: I propose a new channel of spinoff (firm formed when an employee leaves to set up his own firm) formation in which the returns from spinning off are determined endogenously. If high ability workers are scarce, then despite the principal’s ability to offer contracts (endogenous cost of signaling), there exists a separating equilibrium where the high type worker signals his ability by forming a spinoff. This result provides theoretical support to the empirical findings of Skogstrøm (2012). When moral hazard is introduced in the baseline model of adverse selection, I show that the spinoff equilibrium can generate the strongest incentives to work. This has policy implications for non-compete clauses.

Keywords: Reputation; Signaling; Spinoff; Entrepreneurship; Moral hazard; Adverse selection (search for similar items in EconPapers)
JEL-codes: D02 D81 L14 L26 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:149:y:2018:i:c:p:88-105

DOI: 10.1016/j.jebo.2018.02.025

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