Employee Spinoffs and the Solipsistic Entrepreneur

A team of managers engaged in production using technology x, is considering switching to technology y. The value of y is learned slowly over time, but constraints on the ability of individual managers to communicate their beliefs allow disagreements to emerge among team members. Managers who develop sufficiently strong disagreements with their colleagues choose to form new companies to implement their preferred strategy. Out of a symmetric model of disagreement, two distinct classes of spinoffs arise. A type 1 spinoff forms when an employee comes to believe it is worth switching to y but the firm does not. A type 2 spinoff arises when an employee sufficiently disagrees with the firm’s decision to switch strategy that he is willing to invest in order to continue with x. The comparative dynamics of the formation of type 1 and type 2 spinoffs are distinct, and yield some novel testable implications.