Spin-offs and the Market for Ideas / Satyajit Chatterjee, Esteban Rossi-Hansberg.

Format:

Book

Author/Creator:

Chatterjee, Satyajit.

Contributor:

National Bureau of Economic Research.

Rossi-Hansberg, Esteban.

Series:

Working Paper Series (National Bureau of Economic Research) no. w13198.

NBER working paper series no. w13198

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2007.

Summary:

We propose a theory of firm dynamics in which workers have ideas for new projects that can be sold in a market to existing firms or implemented in new firms: spin-offs. Workers have private information about the quality of their ideas. Because of an adverse selection problem, workers can sell their ideas to existing firms only at a price that is not contingent on their information. We show that the option to spin off in the future is valuable so only workers with very good ideas decide to spin off and set up a new firm. Since entrepreneurs of existing firms pay a price for the ideas sold in the market that implies zero expected profits for them, firms' project selection is independent of their size, which, under some assumptions, leads to scale-independent growth. The entry and growth process of firms in this economy leads to an invariant distribution that resembles the one in the US economy.

Notes:

Print version record

June 2007.