09 Jan 2012Working Paper Summaries

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

by Hong Luo

How completely should an innovator develop his idea before selling it? HBS assistant professor Hong Luo addresses this question in a theoretical framework that links the sales stage to the innovator's "observable quality." She uses the context of Hollywood movie script writing-looking at whether it's better to pitch the mere idea for a film or to write the entire screenplay and then try to sell it "on spec." Key concepts include:

Pitching an idea before a script is written can be advantageous in that it affords the opportunity to get early feedback from a prospective buyer, and saves time for the writer if the buyer thinks the idea is worthless. However, pitching comes with the risk of expropriation.
Lesser-known, inexperienced writers are excluded from the market for pitches, forcing them to either fully develop the idea or drop it entirely.
Writers who have a choice in the matter tend to sell their better ideas on spec-turning them into fully-formed screenplays before introducing them to prospective buyers. But they will pitch their worse ideas at an early stage.

Author Abstract

How completely should an innovator develop his idea before selling it? In the context of selling original movie ideas, I present a model that features the writer's private information on the idea's value, different protection levels associated with different development stages, as well as costly buyer participation. The empirical results are consistent with the model's predictions: inexperienced writers are excluded from the market for earlier-stage ideas, restricting their choices to developing the idea fully or abandoning it; writers who have a choice select better ideas to sell at a later stage and sell worse ideas at an earlier stage.