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Full-Text Articles in Social and Behavioral Sciences
The Financing Of Innovation: Learning And Stopping, Dirk Bergemann, Ulrich Hege
The Financing Of Innovation: Learning And Stopping, Dirk Bergemann, Ulrich Hege
Cowles Foundation Discussion Papers
This paper considers the financing of a research project under uncertainty about the time of completion and the probability of eventual success. The uncertainty about future success gradually diminishes with the arrival of addtional funding. The entrepreneur controls the funds and can divert them. We distinguish between relationship financing, meaning that the entrepreneur’s allocation of the funds is observable, and arm’s length financing, where it is unobservable. We find that equilibrium funding stops altogether too early relative to the efficient stopping time in both financing modes. We characterize the optimal contracts and equilibrium funding decisions. The financial constraints will typically …
The Financing Of Innovation: Learning And Stopping, Dirk Bergemann, Ulrich Hege
The Financing Of Innovation: Learning And Stopping, Dirk Bergemann, Ulrich Hege
Cowles Foundation Discussion Papers
This paper considers the financing of a research project under uncertainty about the time of completion and the probability of eventual success. We distinguish between two financing modes, namely relationship financing, where the allocation decision of the entrepreneur is observable, and arm’s length financing, where it is unobservable. We find that equilibrium funding stops altogether too early relative to the efficient stopping time in both financing modes. The rate at which funding is released becomes tighter over time under relationship financing, and looser under arm’s length financing. The trade-off in the choice of financing modes is between lack of commitment …