The Ownership and Implementation of Ideas

Abstract

We study a knowledge-based economy in which efficient production relies on entrepreneurs' managerial talent, and suppliers of complementary project inputs can expropriate entrepreneurs by appropriating their ideas and deploying them elsewhere. The threat of expropriation at early contract negotiation stages forces the entrepreneur to pledge additional rents to her business partner. Once the project is underway, however, the threat of expropriation can be beneficial. This is because it commits the entrepreneur to work harder on the efficient implementation of her idea in order to make it less worthwhile for her partner to destroy project value by expropriating her. We explore the tradeoff between commitment and rent extraction, and identify natural circumstances under which the incentive effect more than outweighs the expropriation rent. A key implication is that transfers of intellectual property rights to business partners can serve as a pre-commitment device for entrepreneurs to execute their ideas in a more efficient manner.