Innovation and the Financial Guillotine
AbstractOur paper demonstrates that while failure tolerance by investors may encourage potential entrepreneurs to innovate, financiers with investment strategies that tolerate early failure endogenously choose to fund less radical innovations. Failure tolerance as an equilibrium price that increases in the level of experimentation. More experimental projects that don't generate enough to pay the price cannot be started. In equilibrium all competing financiers may choose to offer failure tolerant contracts to attract entrepreneurs, leaving no capital to fund the most radical, experimental projects. The tradeoff between failure tolerance and a sharp guillotine helps explain when and where radical innovation occurs.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19379.
Date of creation: Aug 2013
Date of revision:
Note: CF PR
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Other versions of this item:
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
- G39 - Financial Economics - - Corporate Finance and Governance - - - Other
- O31 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-09-24 (All new papers)
- NEP-CFN-2013-09-24 (Corporate Finance)
- NEP-ENT-2013-09-24 (Entrepreneurship)
- NEP-INO-2013-09-24 (Innovation)
- NEP-KNM-2013-09-24 (Knowledge Management & Knowledge Economy)
- NEP-PPM-2013-09-24 (Project, Program & Portfolio Management)
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