The Financing of Innovation: Learning and Stopping - HEC Paris - École des hautes études commerciales de Paris Access content directly
Journal Articles RAND Journal of Economics Year : 2005

The Financing of Innovation: Learning and Stopping

Dirk Bergemann
  • Function : Author

Abstract

We consider the financing of a research project under uncertainty about the time of completion and the probability of eventual success. We distinguish between two financing modes, namely relationship financing, where the allocation decision of the entrepreneur 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. The rate at which funding is released becomes tighter over time under relationship financing, and looser under arm's-length financing. The tradeoff in the choice of financing modes is between lack of commitment with relationship financing and information rents with arm's-length financing.

Domains

No file

Dates and versions

hal-00459926 , version 1 (25-02-2010)

Identifiers

  • HAL Id : hal-00459926 , version 1

Cite

Ulrich Hege, Dirk Bergemann. The Financing of Innovation: Learning and Stopping. RAND Journal of Economics, 2005, Vol.36,n°4, pp.719-752. ⟨hal-00459926⟩

Collections

HEC CNRS
124 View
0 Download

Share

Gmail Facebook X LinkedIn More