When should entrepreneurs choose to enter the market with a start-up? And when should they sell their invention or business idea? New research on how entrepreneurs decide between entry and sale offers significant insights for policy makers concerned about economic welfare.
At first glance, the contribution of start-ups to economic welfare seems to be limited, since many are acquired before they can grow. However, if start-ups benefit from tough bidding competition when they are sold, this encourages them to develop high-quality business or R&D projects, increasing social welfare. The social benefits of such acquisitions depend on whether incumbents can identify high-quality start-ups. The asymmetric information problem can be resolved if inventors first enter the market with a start-up to signal high quality.