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Market frictions in entrepreneurial innovation: Theory and evidence

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  • Cipollone, Angela
  • Giordani, Paolo E.

Abstract

We propose a model of entrepreneurial innovation that rationalizes its pattern of boom and bust. In the model, a successful entrepreneurial project is the result of a search and matching process between entrepreneurs and capitalists. A strategic complementarity between the entrepreneurs’ demand for funds and the capitalists’ supply arises both on the extensive and on the intensive margin. Using data from the Global Entrepreneurship Monitor, and collecting data on the venture capital market of 23 OECD countries plus China for the period 2007–2015, we find robust evidence of complementarity across the two sides of the market. We also provide a quantitative estimate of a multiplier effect originating from such complementarity.

Suggested Citation

  • Cipollone, Angela & Giordani, Paolo E., 2019. "Market frictions in entrepreneurial innovation: Theory and evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 163(C), pages 297-331.
  • Handle: RePEc:eee:jeborg:v:163:y:2019:i:c:p:297-331
    DOI: 10.1016/j.jebo.2019.04.028
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    References listed on IDEAS

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    Cited by:

    1. Angela, Cipollone & Paolo E., Giordani, 2016. "When Entrepreneurs Meet Financiers: Evidence from the Business Angel Market," MPRA Paper 69545, University Library of Munich, Germany.

    More about this item

    Keywords

    Entrepreneurship; Financial frictions; Strategic complementarities; Venture capital; Multiplier effect;

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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