DP3864 Entrepreneurs and New Ideas

Author(s): Bruno Biais, Enrico C Perotti
Publication Date: April 2003
Keyword(s): entreprenuership, experts, ideas, information aggregation, innovation, venture capital
JEL(s): G31
Programme Areas: Financial Economics, Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=3864

Innovative ideas are novel combinations of productive resources potentially addressing an economic need (Schumpeter, 1926). Even promising ideas can be unprofitable if the proposed combination fails on at least one dimension, e.g., it is technically unfeasible or does not respond to a genuine customer need. To screen good ideas the entrepreneur needs to hire experts who evaluate the idea along their dimensions of expertise. Yet sharing the idea creates the risk that an expert would steal it. In this case, the idea-thief cannot contact any other expert, lest he should in turn steal the idea. Thus idea 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 can form a partnership with the experts. Yet very valuable ideas cannot be shared because it is too tempting to steal them.