Romer sells an idea

Paul Romer is best known in economics for generating the models at the heart of endogenous growth theory. One of the main insights of that theory is that our rate of knowledge production is related to the ability of economic agents to appropriate private value from that production. (I have written about this model before).

Scott Stern and I have been focused for years on a micro aspect of this — the way start-up firms appropriate value (click here for an example). We demonstrate that there are good reasons why they should do this by selling out to established firms rather than competing with them. For starters, that competition makes it hard to make profit. But also, being an innovator and marketing products are different things. You might be a good innovator but may struggle to market a product as well as established firms. For that reason, we recommended that start-up firms should consider trading in ideas markets rather than competing in product markets.

So when Paul Romer started Aplia (his economic education firm that I was involved a little in initially) I pretty much knew that they would sell out eventually and nominated Thomson as the obvious choice. It took a little longer than I thought but today they announced just that (click here). So Romer has participated in the ideas market just in the way his own model predicts. Thankfully, the same research predicts it is all for the better in terms of product improvements.

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