The circulation of ideas in firms and markets

The paper compares how di¤erent contractual environments support inven-tion and implementation. Innovative but incomplete ideas require feedback and elaboration by other agents, yet when shared they may be stolen. Markets, as open exchange systems, are good for idea circulation and thus elaboration, but may fail to reward idea generation. Firms, as controlled idea exchange systems, can reward idea generation but restrict their circulation. A key \u85nding is that an e ¢ cient environment requires a symbiotic relationship between markets and open rms, where ideas are allowed to cross \u85rm boundaries. This interaction optimizes the basic trade-o ¤ between protecting rewards to invention and the best implementation of ideas