Spin-offs: theory and evidence from the early U.S. automobile industry

Luis Cabral and Zhu Wang

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

Abstract: We develop \"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-offs (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. ; Also issued as a Payments System Research Working Paper

JEL-codes: L26 L62 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2008-12-01
New Economics Papers: this item is included in nep-bec, nep-com, nep-cta, nep-ent, nep-mic and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Working Paper: Spin-offs: Theory and Evidence from the Early U.S. Automobile Industry (2013)
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