Incentives and Option Value in the Silicon-Valley Tournament Game (Revised)

Author Name AOKI Masahiko  (President, RIETI) /TAKIZAWA Hirokazu  (Fellow, RIETI)
Creation Date/NO. February 2002 02-E-001
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This paper analyzes the "Silicon Valley model" as a novel economic institution in the domain of technological product system innovation such as computers. We focus on the information structural relationship as well as governance relationships between venture capitalists and a cluster of entrepreneurial firms. The informational conditions under which the Silicon Valley model is efficient are identified, leading to understanding the significance of standardization of interfaces,

modularization and information encapsulation. We then examine the governance/incentive aspect of the model by integrating the models by Aoki(2001)and Baldwin and Clark(2000)to give comparative statics results regarding the optimal number of entrepreneurial firms competing in the same component product. The analyses enable us to evaluate the applicability of the model beyond specific localities and industries.