The paper "Entrepreneurs and new ideas" by Enrico Perotti and Bruno Biais was recently accepted for publication at the RAND Journal of Economics.
Abstract
We study how early stage ideas which have never been tried before are evaluated and turned into successful businesses. We adopt the Schumpeterian view that innovative ideas are novel combinations of productive resources, potentially addressing an economic need. Evaluating untested ideas require combining different expertises, as the proposed combination may fail on some critical dimension, such as technical feasibility, correspondence to market demand, legality, or patentability. Thus to screen good ideas the entrepreneur needs to hire experts who evaluate the idea along their dimensions of expertise. Sharing the idea, however, creates the risk that the expert would steal it. Yet, the idea-thief cannot contact any other expert, lest he should in turn steal the idea. Thus stealing leads to incomplete screening and is unattractive if the information of the other expert is critical or highly complementary. In such cases the entrepreneur offers a contingent partnership conditional upon agreement by all experts, thus granting them the advantage of accessing each other's information. Yet, very valuable ideas cannot be shared because it is too tempting to steal them, and need to be developed with limited scrutiny.
