In order to commercialize their ideas, most entrepreneurs need to cooperate with another party. When there are significant and irreversible investments at stake, how far should an entrepreneur develop his idea before selling it? This question is important for entrepreneurs in a variety of contexts, such as research alliances, technology licensing, and VC financing.

 

I study this question in the context of Hollywood, in which the screenwriter decides to sell a storyline versus a complete script. I first build a formal model, in which the writer and the buyer meet to transact an idea. The model incorporates important features of a market for ideas: uncertainty, information asymmetry, expropriation risk, and heterogeneous observable quality of the seller. I then test the model's predictions on a novel sample of 1,638 original movie ideas sold in Hollywood between 1998 and 2003. The data includes sale stage, the writer's characteristics, and the eventual outcome of the sale.

 

I find that, consistent with the theory, the likelihood of a complete script sale is the highest for writers of either low or high observable qualities, and it is the lowest for writers of intermediate observe quality; and a movie sold as a complete script performs better than a movie sold as a storyline for writers of relatively high observable quality.  The results also suggest that for writers of relatively low observable quality, affiliation with a reputable agency (the intermediary) is most effective in reducing information asymmetry; for writers of better observable quality, however, other agency roles, such as increasing the writer's bargaining power, might carry a greater weight.

 

The paper highlights the access barriers to a desirable audience faced by a seller of relatively low observable quality, and the seller's adverse selection behavior. These results have important implications for the strategies of both the entrepreneurs who want to commercialize their ideas and the firms or investors that acquire them, as well as for policies on protection for idea/intellectual property transactions.

 

Intermediary Networks and Market Outcome: Empirical Evidence from the Movie Industry (work in progress)