The Financing of Innovation: Learning and Stopping (2005)
| Venue: | RAND Journal of Economics |
| Citations: | 8 - 1 self |
BibTeX
@ARTICLE{Bergemann05thefinancing,
author = {Dirk Bergemann and Ulrich Hege and Dirk Bergemann and Ulrich Hege and Godfrey Keller and Dima Leshchinskii and Farshad Mashayekhi and Georg Noldeke and Kjell Nyborg and David Pearce and Rafael Repullo and Luca Rigotti and Seminar Basel},
title = {The Financing of Innovation: Learning and Stopping},
journal = {RAND Journal of Economics},
year = {2005},
volume = {36},
pages = {719--752}
}
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Abstract
This paper considers the …nancing of a research project under uncertainty about the time of completion and the probability of eventual success. We distinguish between two …nancing modes, namely relationship …nancing, where the allocation decision of the entrepreneur is observable, and arm’s length …nancing, where it is unobservable. We …nd that equilibrium funding stops altogether too early relative to the e ¢ cient stopping time in both …nancing modes. The rate at which funding is released becomes tighter over time under relationship …nancing, and looser under arm’s length …nancing. The trade-o ¤ in the choice of …nancing modes is between lack of commitment with relationship …nancing and information rents with arm’s length …nancing.
