Can starving start-ups beat fat labs? A bandit model of innovation with endogenous financing constraint

Alessandro Spiganti

Research output: Contribution to journalArticlepeer-review

Abstract

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 languageEnglish
JournalThe Scandinavian Journal of Economics
Early online date3 Oct 2018
DOIs
Publication statusE-pub ahead of print - 3 Oct 2018

Keywords

  • exploration versus exploitation
  • arm's length versus relationship-based financing
  • firm dynamics
  • cash flow diversion
  • financing constraints

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