Spinoffs and the Market for Ideas

54 Pages Posted: 29 Oct 2008

See all articles by Satyajit Chatterjee

Satyajit Chatterjee

Federal Reserve Bank of Philadelphia

Esteban Rossi-Hansberg

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2008

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 spinoff. 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 US economy and most of its individual industries.

Suggested Citation

Chatterjee, Satyajit and Rossi-Hansberg, Esteban Alejandro, Spinoffs and the Market for Ideas (October 2008). FRB of Philadelphia Working Paper No. 08-26. Available at SSRN: https://ssrn.com/abstract=1291370 or http://dx.doi.org/10.2139/ssrn.1291370

Satyajit Chatterjee (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

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Esteban Alejandro Rossi-Hansberg

Princeton University - Department of Economics ( email )

Princeton, NJ
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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