The Size Distribution of Profits from Innovation

The research reported in this paper seeks to determine how skewed the distribution of profits from technological innovation is -- i.e., whether it conforms most closely to the Paretian, log normal, or some other distribution. The question is important, because high skewness makes it difficult to pursue risk-hedging portfolio strategies. This paper examines data from several sources -- the royalties from U.S. university patent portfolios, the quasi-rents from marketed pharmaceutical entities, and the returns from two large samples of high-technology venture startups. The evidence reveals a distribution closer to log normality than Paretian. Preliminary hypotheses about the underlying behavioral processes are advanced.

Scherer, Frederic M. (1996), The Size Distribution of Profits from Innovation, ZEW Discussion Paper No. 96-13, Mannheim.