Spinoffs and the Market for Ideas

41 Pages Posted: 24 Feb 2012

See all articles by Satyajit Chatterjee

Satyajit Chatterjee

Federal Reserve Bank of Philadelphia

Esteban Rossi‐Hansberg

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: February 2012

Abstract

We present a theory of entry through spinoffs where workers generate ideas and possess private information concerning their quality. Because quality is privately observed, adverse selection implies that the market can only offer a price that reflects the average quality of ideas sold. Only workers with good ideas decide to spin off, whereas workers with mediocre ideas sell them. Existing firms pay a price for ideas sold in the market that implies zero expected profits. Hence, firms’ project selection is independent of firm size, which can lead to scale‐independent growth. This mechanism results in invariant firm‐size distributions that resemble the data.

Suggested Citation

Chatterjee, Satyajit and Rossi‐Hansberg, Esteban, Spinoffs and the Market for Ideas (February 2012). International Economic Review, Vol. 53, Issue 1, pp. 53-93, 2012. Available at SSRN: https://ssrn.com/abstract=2010295 or http://dx.doi.org/10.1111/j.1468-2354.2011.00671.x

Satyajit Chatterjee (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

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Esteban Rossi‐Hansberg

affiliation not provided to SSRN

No Address Available

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