Signalling, Reputation and Spinoffs
35 Pages Posted: 31 Aug 2016 Last revised: 17 Jul 2018
Date Written: February 19, 2018
Abstract
I propose a new channel of spinoff (firm formed when an employee leaves to set up his own firm) formation in which the returns from spinning off are determined endogenously. If high ability workers are scarce, then despite the principal's ability to offer contracts (endogenous cost of signalling), there exists a separating equilibrium where the high type worker signals his ability by forming a spinoff. This result provides theoretical support to the empirical findings of Skogstrom (2012). When moral hazard is introduced in the baseline model of adverse selection, I show that the spinoff equilibrium can generate the strongest incentives to work. This has policy implications for non-compete clauses.
Keywords: Signalling, Reputation, Moral Hazard, Non Compete Clause, Adverse Selection
JEL Classification: L14, L26, D81, D02
Suggested Citation: Suggested Citation