Discussion paper

DP5469 The Circulation of Ideas: Firms Versus Markets

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.


Perotti, E and T Hellmann (2006), ‘DP5469 The Circulation of Ideas: Firms Versus Markets‘, CEPR Discussion Paper No. 5469. CEPR Press, Paris & London. https://cepr.org/publications/dp5469