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Abstract / Description of output
Is there any such thing as too much capital when it comes to the financing of innovative projects? We study a principal-agent model in which the principal chooses the scale of the experiment, and the agent privately observes the outcome realizations and can privately choose the novelty of the project. When the agent has private access to a safe but non-innovative project, the principal starves the agent of funds to incentivise risk-taking. The principal quickly scales up after early successes, and may tolerate early failures. If the principal is equally informed about the outcome, the agent is well-resourced, resembling a large R&D department.
Original language | English |
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Journal | The Scandinavian Journal of Economics |
Early online date | 3 Oct 2018 |
DOIs | |
Publication status | E-pub ahead of print - 3 Oct 2018 |
Keywords / Materials (for Non-textual outputs)
- exploration versus exploitation
- arm's length versus relationship-based financing
- firm dynamics
- cash flow diversion
- financing constraints
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