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The Return to Independent Invention: Evidence of Unrealistic Optimism, Risk Seeking or Skewness Loving?

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Author Info
Thomas Astebro (University of Waterloo)
Abstract

Examining a sample of 1,091 inventions I investigate the magnitude and distribution of the pretax internal rate of return (IRR) to inventive activity. The average IRR on a portfolio investment in these inventions is 11.4%. This is higher than the risk--free rate but lower than the long--run return on high--risk securities and the long--run return on early--stage venture capital funds. The portfolio IRR is significantly higher, for some ex ante identifiable classes of inventions. The distribution of return is skew: only between 7--9% reach the market. Of the 75 inventions that did, six realised returns above 1400%, 60% obtained negative returns and the median was negative. Copyright Royal Economic Society 2003.

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 113 (2003)
Issue (Month): 484 (January)
Pages: 226-239
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Handle: RePEc:ecj:econjl:v:113:y:2003:i:484:p:226-239

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  1. Mansfield, Edwin, et al, 1977. "Social and Private Rates of Return from Industrial Innovations," The Quarterly Journal of Economics, MIT Press, vol. 91(2), pages 221-40, May. [Downloadable!] (restricted)
  2. F. M. Scherer & Dietmar Harhoff & J, rg Kukies, 2000. "Uncertainty and the size distribution of rewards from innovation," Journal of Evolutionary Economics, Springer, vol. 10(1), pages 175-200. [Downloadable!] (restricted)
  3. de Meza, David & Southey, Clive, 1996. "The Borrower's Curse: Optimism, Finance and Entrepreneurship," Economic Journal, Royal Economic Society, vol. 106(435), pages 375-86, March. [Downloadable!] (restricted)
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  4. F. M. Scherer, 1998. "The Size Distribution of Profits from Innovation," Annales d'Economie et de Statistique, ADRES, issue 49-50, pages 20, Janvier-J. [Downloadable!]
  5. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June. [Downloadable!] (restricted)
  6. John H. Cochrane, 2001. "The Risk and Return of Venture Capital," NBER Working Papers 8066, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Boyan Jovanovic & Balàzs Szentes, 2007. "On the Return to Venture Capital," NBER Working Papers 12874, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Davis, Lee N. & Davis, Jerome & Hoisl, Karin, 2009. "What Inspires Leisure Time Invention?," Discussion Papers in Business Administration 10457, University of Munich, Munich School of Management. [Downloadable!]
  3. Thomas Astebro & Peter Thompson, 2007. "Entrepreneurs: Jacks of all Trades or Hobos?," Working Papers 0705, Florida International University, Department of Economics. [Downloadable!]
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