EconPapers    
Economics at your fingertips  
 

The Financing of Innovation: Learning and Stopping

Dirk Bergemann () and Ulrich Hege ()

No 2763, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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 diminishes gradually with the arrival of additional 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 become tighter over time under relationship finance, and looser under arm's length financing. The trade-off is that while relationship financing may require smaller information rents, arm's length financing amounts to an implicit commitment to a finite funding horizon. The lack of such a commitment under relationship financing implies that the sustainable release of funds eventually slows down. We obtain the surprising result that arm's length contracts are preferable in a Pareto sense.

Keywords: Arm's Length Financing; Innovation; Learning; Markov Perfect Equilibrium; Relationship Financing; Renegotiation; Stopping; Time-Consistency; Venture Capital (search for similar items in EconPapers)
JEL-codes: D83 D92 G24 G31 (search for similar items in EconPapers)
Date: 2001-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8) Track citations by RSS feed

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2763 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: The Financing of Innovation: Learning and Stopping (2012)
Journal Article: The Financing of Innovation: Learning and Stopping (2005)
Working Paper: The Financing of Innovation: Learning and Stopping (2005)
Working Paper: The Financing of Innovation: Learning and Stopping (2004) Downloads
Working Paper: The Financing of Innovation: Learning and Stopping (2001) Downloads
Working Paper: The Financing of Innovation: Learning and Stopping (2001) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:2763

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... ers/dp.php?dpno=2763

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().

 
Page updated 2019-12-13
Handle: RePEc:cpr:ceprdp:2763