DP985 | Asymmetric Information, Agency Costs and Innovative Entry

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31/07/1994

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Abstract

The decision of how best to appropriate the value of new economic knowledge is reached by individuals within the context of the decision-making process embedded in the principal-agent model and applied to organizations. Because new economic knowledge is not only imperfect but also inherently asymmetric across agents, a divergence in beliefs about its potential value can arise between an agent possessing that knowledge and the decision-making bureaucracy in a hierarchical organization. This leads to the prediction that agents are more likely to resort to starting a new firm in an effort to maximize the value of their potential innovation in industries characterized by a greater degree of knowledge asymmetries. Based on a panel data-base identifying new-firm start-ups in US manufacturing between 1976 and 1986 there is considerable evidence consistent with the hypothesis that start-up activity is shaped by the underlying knowledge conditions, or what is called the technological regime. New-firm start-ups are apparently less important under the routinized technological regime, where innovative activity tends to occur within the boundaries of incumbent enterprises. By contrast, under the entrepreneurial technological regime, where knowledge asymmetries are particularly prevalent, new-firm start-up activity plays a more important role.