Spino¤s and the Market for Ideas

We present a theory of spino¤s in which workers generate productive ideas and possess private information concerning their quality. Because quality is privately observed, by the standard adverse-selection logic, the market can at best o¤er a price that re‡ects the average quality of ideas sold. This gives the holders of above-average-quality ideas the incentive to spin o¤. We show that only workers with very good ideas decide to spin o¤, while workers with mediocre ideas sell them. Entrepreneurs of existing …rms pay a price for the ideas sold in the market that implies zero expected pro…ts for them. Hence, …rms’project selection is independent of …rm size, which, under some additional assumptions, leads to scale-independent growth. The entry and growth process of …rms leads to invariant …rm-size distributions that resemble the ones for the US economy and most of its individual industries.