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Project Title

What Drives the Establishment of Spinoffs?


Peter Thompson, Florida State University

Christian Catalina, University of Toronto

Project Abstract

Employee spinoffs have played a significant role in the early evolution of many high-tech industries. What drives employees to establish spinoffs? A common theme of empirical studies that focus on motives is that they arise from frustration by employees over rejection of their ideas by their employers. Although a number of models of spinoff formation have been developed, none of them seems to capture this phenomenon. If disagreement about the value of new ideas is a major driving force of spinoff formation, then it is possible that some of what has been learned from previous models about optimal contract design, the role of spinoffs in the adoption and diffusion of new technology, and the implications of certain policies such as recognition of non-complete covenants, is misleading. This project therefore consists of theoretical work, new data construction, and empirical investigation of a theory of employee spinoff formation that specifically focuses on frustration arising from disagreements about the merit of new ideas. Two datasets will be constructed:(i) A dataset that merges information on British automobile firms and coach-building firms, which will enable tests of the predictions of the theory concerning the formation and performance of different types of spinoffs; and (ii) A dataset on the software forks in the open source software sector, which will facilitate direct tests of the evolution of disagreement among team members.