The Circulation of Ideas: Firms versus Markets

NOTE: THU, 4PM Enrico Perotti, Department of Economics, University of Amsterdam

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 di¤erent contractual environments support invention
and implementation. Markets, as open exchange systems, are good for circu-
lation 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.

Date: 07 April-00 0000