Working Paper: NBER ID: w13198
Authors: Satyajit Chatterjee; Esteban Rossi-Hansberg
Abstract: We 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. We 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.
Keywords: No keywords provided
JEL Codes: E10; E23; L22; L23; L25; L26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Quality of idea (L15) | Decision to spin off (L24) |
| Private information (D82) | Decision to implement within existing firm or spin off (L26) |
| Market for ideas (O36) | Firm growth rates (L25) |
| Larger firms (L25) | More spin-offs (Y80) |
| Quality of ideas (L15) | Implementation outcomes (D78) |
| Market dynamics (D49) | Firm profitability (L21) |