| Abstract: |
New firms are often based on ideas that the founders developed while working
for incumbent firms. We study the macroeconomic effects of spinoffs through a
growth model of product variety expansion, driven by firm entry, and product
innovation. Spinoffs stem from conflicts of interest between incumbent firms'
shareholders and employees. The analysis suggests that incumbents invest more
in product innovation when knowledge protection is stronger. An inverted-U
shape relationship emerges, however, between the intensity of spinoff
activities and the strength of the rule of law. A calibration experiment
indicates that, with a good rule of law, loosening knowledge protection by 53
reduces product innovation by one fifth in the short run and one seventh in
the long run, but boosts the spinoff rate by one tenth and one sixth in the
short and long run, respectively. Nevertheless, per capita income growth drops
and welfare deteriorates. The trade-offs are broadly consistent with evidence
from Italian firms. |