Working Paper: CEPR ID: DP3864
Authors: Bruno Biais; Enrico C. Perotti
Abstract: Innovative ideas are novel combinations of productive resources potentially addressing an economic need (Schumpeter, 1926). Even promising ideas can be unprofitable if the proposed combination fails on at least one dimension, e.g., it is technically unfeasible or does not respond to a genuine customer need. To screen good ideas the entrepreneur needs to hire experts who evaluate the idea along their dimensions of expertise. Yet sharing the idea creates the risk that an expert would steal it. In this case, the idea-thief cannot contact any other expert, lest he should in turn steal the idea. Thus idea stealing leads to incomplete screening and is unattractive if the information of the other expert is critical or highly complementary. In such cases the entrepreneur can form a partnership with the experts. Yet very valuable ideas cannot be shared because it is too tempting to steal them.
Keywords: entrepreneurship; experts; ideas; information aggregation; innovation; venture capital
JEL Codes: G31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| entrepreneur's ability to aggregate expert signals (D82) | criticality of expert information (D80) |
| critical expert signal (C24) | reliable partnership formation (L14) |
| lack of critical expert signal (D82) | risk of idea stealing increases (O36) |
| strongly complementary signals (D10) | reduced attractiveness of idea stealing (O36) |
| expert signals (C51) | project viability (O22) |
| both experts critical (Y30) | entrepreneur captures entire expected net present value (L26) |
| neither expert critical (Y30) | market breakdown occurs (G10) |
| expected cash flows from project (O22) | attractiveness of idea stealing (O36) |