Spin-Offs and the Market for Ideas

37 Pages Posted: 25 Jun 2007

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: June 2007

Abstract

The authors propose a theory of firm dynamics in which workers have ideas for new projects that can be sold in a market to existing firms or implemented in new firms: spin-offs. Workers have private information about the quality of their ideas. Because of an adverse selection problem, workers can sell their ideas to existing firms only at a price that is not contingent on their information. The authors show that the option to spin off in the future is valuable so only workers with very good ideas decide to spin off and set up a new firm. Since entrepreneurs of existing firms pay a price for the ideas sold in the market that implies zero expected profits for them, firms' project selection is independent of their size, which, under some assumptions, leads to scale-independent growth. The entry and growth process of firms in this economy leads to an invariant distribution that resembles the one in the US economy.

Suggested Citation

Chatterjee, Satyajit and Rossi-Hansberg, Esteban Alejandro, Spin-Offs and the Market for Ideas (June 2007). FRB of Philadelphia Working Paper No. 07-15. Available at SSRN: https://ssrn.com/abstract=995007 or http://dx.doi.org/10.2139/ssrn.995007

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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