Venture Capitalists, Asymmetric Information and Ownership in the Innovation Process

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Venture Capitalists, Asymmetric Information and Ownership in the Innovation Process

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Fabrizi, Simona
Lippert, Steffen
Norback, Pehr-Johan
Persson, Lars

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Abstract

This paper constructs a model where entrepreneurial innovations are sold into oligopolistic industries and where adverse selection problems between entrepreneurs, venture capitalists and incumbents are present. We first show that aggressive development of a basic innovation by better informed venture-backed firms is used as a signaling device to enhance the sale price of the innovation. We then show that incumbents can undertake early, preemptive, acquisitions to prevent such signaling driven overinvestment, despite the risk of buying a non-productive innovation. Therefore, to exist in equilibrium, venture capitalists must be sufficiently more efficient in selecting innovation projects, otherwise preemptive acquisitions will take place.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 6265.

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Date of creation: 15 Nov 2007
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Handle: RePEc:pra:mprapa:6265

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Find related papers by JEL classification:
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
M13 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - New Firms; Startups
G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
O3 - Economic Development, Technological Change, and Growth - - Technological Change

This paper has been announced in the following NEP Reports:

NEP-ALL-2007-12-19 (All new papers)
NEP-COM-2007-12-19 (Industrial Competition)
NEP-ENT-2007-12-19 (Entrepreneurship)
NEP-INO-2007-12-19 (Innovation)
NEP-MIC-2007-12-19 (Microeconomics)
NEP-PPM-2007-12-19 (Project, Program & Portfolio Management)
NEP-TID-2007-12-19 (Technology & Industrial Dynamics)

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Technology Assessment

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