Aggressive Pivots and Entrepreneurial Skill

Xuelin Li and Martin Szydlowski

American Economic Journal: Microeconomics, 2025, vol. 17, issue 2, 28-65

Abstract: We study pivots as signaling devices in a dynamic experimentation model. An entrepreneur receives funding from an investor and has private information about a project, which requires costly experimentation to succeed. The entrepreneur has a real option to pivot, i.e., to abandon the project and to start a new one. Investors learn about the project from the arrival of exogenous information and from the entrepreneur's pivoting decisions. We characterize signaling equilibria in which high-skill entrepreneurs pivot early. Such early pivots are associated with higher likelihood of success and with more favorable funding terms following the pivot.

JEL-codes: D21 D82 L26 M13 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1257/mic.20240075

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