Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/320008 
Year of Publication: 
2020
Series/Report no.: 
CASMEF Working Paper Series No. WP 2020/02
Publisher: 
LUISS Guido Carli, Department of Economics and Finance, Arcelli Centre for Monetary and Financial Studies, Rome
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 5\% 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 firm.
Subjects: 
Corporate governance
Endogenous growth
Spinoffs
JEL: 
E44
O40
G30
Document Type: 
Working Paper

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