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Market Frictions in Entrepreneurial Innovation: Theory and Evidence

Angela Cipollone () and Paolo Giordani

No 1505, Working Papers CELEG from Dipartimento di Economia e Finanza, LUISS Guido Carli

Abstract: This paper proposes a model of entrepreneurial innovation that explains its pronounced pattern of boom and bust. In the model, a successful entrepreneurial project is the result of a search and matching process between entrepreneurs looking for funds and capitalists looking for new ideas to finance. The resulting strategic complementarity between them gives rise to a multiplier effect, whereby any exogenous shock has a magnified effect on the process of innovation. Hand-collecting data on the venture capital market of 21 developed countries for the period 2004-2012, we show that, at the country level, a complementarity exists between the size of the venture capital sector and the number of innovative entrepreneurs. This evidence suggests the existence of a thick market externality in the financial market for innovation.

Keywords: Financing of innovation; search and matching; strategic complementarities; venture capital. (search for similar items in EconPapers)
JEL-codes: C78 L26 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-dge, nep-ent and nep-ino
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Journal Article: Market frictions in entrepreneurial innovation: Theory and evidence (2019) Downloads
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