When to Sell Your Idea: Theory and Evidence from the Movie Industry

Hong Luo (New York University)

Abstract: 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 the U.S. movie industry, 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 the heterogeneous observable quality of the seller. I then test the model’s predictions on a novel sample of idea sales from Hollywood. The empirical results confirm the predictions: 1) conditional on sale, the likelihood of a complete script has a non-monotonic relationship with respect to the writer’s observable quality; and 2) conditional on release, a movie purchased as a complete script, on average, performs better than a movie purchased as a storyline when the writer’s observable quality is relatively high. The paper highlights the access barriers to a desirable audience faced by a seller of relatively low observable quality, as well as the seller’s selection behavior in choosing when to sell. These results have interesting implications for the strategies of both the entrepreneurs and the buyers, as well as for policies on protection for idea/intellectual property transactions.

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