AbstractEntrepreneurs must experiment to learn how good they are at a new activity. What happens when the experimentation is financed by a lender? Under common scenarios, i.e., when there is the opportunity to learn by "starting small" or when "no-compete" clauses cannot be enforced ex-post, we show that financing experi- mentation can become harder precisely when it is more profitable, i.e., for lower values of the known-arm and for more optimistic priors. Endogenous collateral requirements (like those frequently observed in micro-credit schemes) are shown to be part of the optimal contract. JEL classification: Experimentation ; Moral Hazard ; Adverse Selection ; Starting Small ; Competition JEL codes: D81 ; D86 ; G30
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Bibliographic InfoPaper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 1025.
Date of creation: 2013
Date of revision:
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-10-02 (All new papers)
- NEP-COM-2013-10-02 (Industrial Competition)
- NEP-CTA-2013-10-02 (Contract Theory & Applications)
- NEP-ENT-2013-10-02 (Entrepreneurship)
- NEP-HRM-2013-10-02 (Human Capital & Human Resource Management)
- NEP-MIC-2013-10-02 (Microeconomics)
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