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Venture Capitalists, Asymmetric Information, and Ownership in the Innovation Process

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  • Fabrizi, Simona

    (Massey University Auckland)

  • Lippert, Steffen

    (Massey University Auckland)

  • Norbäck, Peh

    ()
    (Research Institute of Industrial Economics (IFN))

  • Persson, Lars

    ()
    (Research Institute of Industrial Economics (IFN))

Abstract

In this paper we construct a model in which entrepreneurial innovations are sold into oligopolistic industries and where adverse selection problems between entrepreneurs, venture capitalists and incumbents are present. We show that as exacerbated development by better-informed venture-backed rms is used as a signal to enhance the sale price of developed innovations, venture capitalists must be sufciently more ecient in selecting innovative projects than incumbents in order to exist in equilibrium. Otherwise, incumbents undertake early preemptive, acquisitions to prevent the venture-backed rms' signaling-driven investment, despite the risk of buying a bad innovation. We nally show at what point the presence of active venture capitalists increases the incentives for entrepreneurial innovations.

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Bibliographic Info

Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 776.

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Length: 38 pages
Date of creation: 06 Nov 2008
Date of revision:
Handle: RePEc:hhs:iuiwop:0776

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Keywords: Venture Capitalists; Innovation; Entrepreneurs; Signaling; Development;

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References

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Cited by:
  1. Francis Bloch & Simona Fabrizi & Steffen Lippert, 2011. "Learning and Collusion in New Markets with Uncertain Entry Costs," Working Papers 1112, University of Otago, Department of Economics, revised Dec 2011.
  2. Pehr-Johan Norbäck & Lars Persson & Joacim Tag, 2013. "Buying to Sell: Private Equity Buyouts and Industrial Restructuring," CESifo Working Paper Series 4338, CESifo Group Munich.

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