Investment in ideas when genius and madness look alike
Economics Bulletin, 2019, vol. 39, issue 2, 947-953
I study a situation in which investors use a noisy signal of the quality of an entrepreneur's idea in order to decide how much to invest. However, while ideas of middling quality are quite easy to evaluate, the most ingenious ideas are hard to distinguish from the most terrible ideas. This results in systematic over-investment in the very worst ideas and under-investment in the very best ideas. If the entrepreneur has a threshold for what offer of funding they are willing to accept, the very worst ideas are more likely to be funded than much better ideas. Some known quirks of investment return patters can be explained in this framework, without asymmetric information.
Keywords: innovation; noisy quality signals; investor funding; entrepreneurship; investment returns (search for similar items in EconPapers)
JEL-codes: D8 L2 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:ebl:ecbull:eb-19-00037
Access Statistics for this article
More articles in Economics Bulletin from AccessEcon
Bibliographic data for series maintained by John P. Conley ().