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Why Entrepreneurs Choose Risky R&D Projects - But Still Not Risky Enough

Author

Listed:
  • Färnstrand Damsgaard, Erika

    (National Institute of Economic Research)

  • Norbäck, Pehr-Johan

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

  • Persson, Lars

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

  • Vasconcelos, Helder

    (Faculdade de Economia, Universidade do Porto)

Abstract

Entrepreneurs face higher commercialization costs than incumbents. We show that this implies that entrepreneurs will choose more risky projects than incumbents, aiming to reduce their high expected marginal commercialization cost. However, entrepreneurs may select too safe projects from a social point of view, since they do not internalize the business stealing effect. We also show that commercialization support induces entrepreneurship but may lead to mediocre entrepreneurship by inducing entrepreneurs to choose less risky projects, whereas R&D support encourages entrepreneurship without affecting the type of entrepreneurship. Using Swedish patent citation data, we find empirical support for predictions of the model.

Suggested Citation

  • Färnstrand Damsgaard, Erika & Norbäck, Pehr-Johan & Persson, Lars & Vasconcelos, Helder, 2012. "Why Entrepreneurs Choose Risky R&D Projects - But Still Not Risky Enough," Working Paper Series 926, Research Institute of Industrial Economics.
  • Handle: RePEc:hhs:iuiwop:0926
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    References listed on IDEAS

    as
    1. Manuel Trajtenberg, 1990. "A Penny for Your Quotes: Patent Citations and the Value of Innovations," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 172-187, Spring.
    2. Crampes, C. & Langinier, C., 2000. "Ligation and Settlement in Patent Infringement Case," Papers 00-537, Toulouse - GREMAQ.
    3. Hall, B. & Jaffe, A. & Trajtenberg, M., 2001. "The NBER Patent Citations Data File: Lessons, Insights and Methodological Tools," Papers 2001-29, Tel Aviv.
    4. Cohen, Wesley M & Klepper, Steven, 1996. "A Reprise of Size and R&D," Economic Journal, Royal Economic Society, vol. 106(437), pages 925-951, July.
    5. Cohen, Wesley M & Klepper, Steven, 1996. "Firm Size and the Nature of Innovation within Industries: The Case of Process and Product R&D," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 232-243, May.
    6. Jean O. Lanjouw & Mark Schankerman, 1999. "The Quality of Ideas: Measuring Innovation with Multiple Indicators," NBER Working Papers 7345, National Bureau of Economic Research, Inc.
    7. Maksimovic, Vojislav & Zechner, Josef, 1991. " Debt, Agency Costs, and Industry Equilibrium," Journal of Finance, American Finance Association, vol. 46(5), pages 1619-1643, December.
    8. Svensson, Roger, 2007. "Commercialization of patents and external financing during the R&D phase," Research Policy, Elsevier, vol. 36(7), pages 1052-1069, September.
    9. Joseph Farrell & Carl Shapiro, 1990. "Asset Ownership and Market Structure in Oligopoly," RAND Journal of Economics, The RAND Corporation, vol. 21(2), pages 275-292, Summer.
    10. Claude Crampes & Corinne Langinier, 2002. "Litigation and Settlement in Patent Infringement Cases," RAND Journal of Economics, The RAND Corporation, vol. 33(2), pages 258-274, Summer.
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    More about this item

    Keywords

    Entrepreneurship; Innovation; Start-ups; Ownership; Breakthrough; Quality;

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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