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Market Frictions in Entrepreneurial Innovation: Theory and Evidence

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  • Angela Cipollone

    () (CeLEG (Center for Labor and Economic Growth))

  • Paolo E. Giordani

    () (LUISS "Guido Carli" University)

Abstract

This paper proposes a model of entrepreneurial innovation that explains its pronounced pattern of boom and bust. In the model, a successful entrepreneurial project is the result of a search and matching process between entrepreneurs looking for funds and capitalists looking for new ideas to finance. The resulting strategic complementarity between them gives rise to a multiplier effect, whereby any exogenous shock has a magnified effect on the process of innovation. Hand-collecting data on the venture capital market of 21 developed countries for the period 2004-2012, we show that, at the country level, a complementarity exists between the size of the venture capital sector and the number of innovative entrepreneurs. This evidence suggests the existence of a thick market externality in the financial market for innovation.

Suggested Citation

  • Angela Cipollone & Paolo E. Giordani, 2015. "Market Frictions in Entrepreneurial Innovation: Theory and Evidence," Working Papers CELEG 1505, Dipartimento di Economia e Finanza, LUISS Guido Carli.
  • Handle: RePEc:lui:celegw:1505
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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

    Financing of innovation; search and matching; strategic complementarities; venture capital.;

    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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