Spin-offs: Theory and Evidence from the Early U.S. Automobile Industry
Federal Reserve Bank of Kansas City Working Paper No. 08-15
31 Pages Posted: 31 Jan 2009 Last revised: 29 Oct 2014
Date Written: December 22, 2008
We develop a "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-off (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.
Keywords: Passive learning, entry and exit
JEL Classification: J6, L0
Suggested Citation: Suggested Citation