DP5469 The Circulation of Ideas: Firms Versus Markets

Author(s): Thomas F Hellmann, Enrico C Perotti
Publication Date: January 2006
Keyword(s): firms, ideas, innovation
JEL(s): D83, L22, M13, O31
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=5469

We describe new ideas as incomplete concepts for which the innovator needs feedback from agents with complementary skills. Once shared, ideas may be stolen. We compare how different contractual environments support invention and implementation. Markets, as open exchange systems, are good for circulation and thus elaboration, but may fail to reward idea generation. Firms, as controlled idea exchange systems, can reward idea generation but can do so only by restricting their circulation. This identifies a basic trade-off between protecting the rights of invention and the best implementation of ideas. An environment that allows ideas to cross firm boundaries enhances the rate of innovation and creates a symbiotic relationship between markets and firms.