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Venture Capitalists, Asymmetric Information, and Ownership in the Innovation Process

Simona Fabrizi (), Steffen Lippert, Pehr-Johan Norbäck and Lars Persson

No 776, Working Paper Series from Research Institute of Industrial Economics

Abstract: In this paper we construct a model in which entrepreneurial innovations are sold into oligopolistic industries and where adverse selection problems between entrepreneurs, venture capitalists and incumbents are present. We show that as exacerbated development by better-informed venture-backed firms is used as a signal to enhance the sale price of developed innovations, venture capitalists must be sufficiently more efficient in selecting innovative projects than incumbents in order to exist in equilibrium. Otherwise, incumbents undertake early preemptive, acquisitions to prevent the venture-backed firms' signaling-driven investment, despite the risk of buying a bad innovation. We finally show at what point the presence of active venture capitalists increases the incentives for entrepreneurial innovations.

Keywords: Venture Capitalists; Innovation; Entrepreneurs; Signaling; Development (search for similar items in EconPapers)
JEL-codes: C70 D21 D82 G24 L20 M13 O30 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2008-11-06
New Economics Papers: this item is included in nep-cfn, nep-com, nep-cta, nep-ent, nep-ino, nep-knm, nep-mic, nep-ppm and nep-tid
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Venture Capital, Patenting, and Usefulness of Innovations (2011) Downloads
Working Paper: Venture Capitalists, Asymmetric Information and Ownership in the Innovation Process (2007) Downloads
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