The Circulation of Ideas in Firms and Markets

Innovative but incomplete ideas require feedback and elaboration by other agents with complementary skills, yet when shared they may be stolen. The paper compares how di¤erent contractual environments support invention and implementation. Markets, as open exchange systems, are good for idea circulation and thus elaboration, but may fail to reward idea generation. Firms, as controlled idea exchange systems, can reward idea generation but restrict their circulation. A key …nding is that an e¢ cient environment requires a symbiotic relationship between markets and open …rms, where ideas are allowed to cross …rm boundaries. This interaction optimizes the basic trade-o¤ between protecting rewards to invention and the best implementation of ideas. Key Words: Ideas, Innovation, Entrepreneurship, Firm Organization, Start-Ups JEL Classi…cation: D83, L22, M13, O31 For correspondence please use: Thomas Hellmann, Sauder School of Business, Univeristy of British Columbia, Vancouver, BC V6T 1Z2, Canada; Email: [email protected]; Tel: (604) 822-8476; Fax: (604) 822-8477. The latest version of this paper can always be downloaded from: http://strategy.sauder.ubc.ca/hellmann/ yFor correspondence please use: Enrico Perotti, University of Amsterdam, Faculty of Economics and Econometrics; Email: [email protected]; Tel: 31-20-525-4159; Fax: 31-20-525-5285. zWe would like to thank Daron Acemoglu, Amar Bhidé, Oliver Hart, Josh Lerner, Scott Stern, and seminar participants at the AEA-AFE session on Financing Innovation in Philadelphia, London School of Economics, London Business School, NBER Entrepreneurship Group, NBER Organizational Economics Group, Stanford GSB, University College London, University of Amsterdam, and the University of British Columbia, for their valuable comments. All errors are ours.