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Can Starving Start‐ups Beat Fat Labs? A Bandit Model of Innovation with Endogenous Financing Constraint

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  • Alessandro Spiganti

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 incentivize risk‐taking. The principal quickly scales up after early successes, and can tolerate early failures. If the principal is equally informed about the outcome, then the agent is well‐resourced, resembling a large research and development department.

Suggested Citation

  • Alessandro Spiganti, 2020. "Can Starving Start‐ups Beat Fat Labs? A Bandit Model of Innovation with Endogenous Financing Constraint," Scandinavian Journal of Economics, Wiley Blackwell, vol. 122(2), pages 702-731, April.
    • Handle: RePEc:bla:scandj:v:122:y:2020:i:2:p:702-731
    DOI: 10.1111/sjoe.12333
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    3. Peisen LIU & Yufeng XIA, 2021. "Bank Competition and Firm Innovation Output: The Role of Financing Constraints," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 171-188, December.

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