Verifying High Quality: Entry for Sale
54 Pages Posted: 14 Jul 2020 Last revised: 6 Aug 2020
Date Written: March 5, 2019
When and how do entrepreneurs sell their inventions? To address this issue, we develop an endogenous entry-sale asymmetric information oligopoly model. We show that lowquality inventions are sold directly or used for entry. Inventors who sell post-entry use entry to credibly reveal information on quality. Incumbents are then willing to pay high prices for high-quality inventions to preempt rivals from obtaining them. Using Swedish data on patents granted to small firms and individuals, we find evidence that high-quality inventions are sold under preemptive bidding competition, post entry.
Keywords: Acquisitions, Innovation, Start-ups, Ownership, Patents, Verification, Quality
JEL Classification: G24, L1, L2, M13, O3
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