Bargaining Over New Ideas: Rent Distribution and Stability of Innovative Firms1

We analyze a model of bargaining over new ideas. The model accounts for the problem of information leakage, i.e., the diffusion of information about the idea before and after the idea is implemented. We analyze the effects of information leakage on the distribution of rents within firms and the firms’ stability to the introduction of innovation. In the model, the distribution of rents in a firm reflects the distribution of information about the idea. We show how the balance of power between the innovators and their collaborators depends on market conditions and firms’ size. The model also provides a formal link between the organization of firms and their stability: the model predicts that, a larger firm will tend to be less stable to the introduction of innovation.