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Financing Mechanisms and R&D Investment

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  • Haizhou Huang
  • Chenggang Xu

Abstract

This paper analyzes how financial institutions affect efficiency in R&-D investments by providing a new contractual foundation for soft budget constraints. We show those inefficient elements (informational asymmetries and conflicts of interest among co-investors) in multi-investor financing can be used as, a commitment device to stop bad projects which are discovered ex post. In the case of single investors financing (such as internal financing). However, the commitment device does not exist. Our theory predicts that optimally many investors should finance an R&-D project if there are high uncertainties. Otherwise, internal financial preferable. In addition, an institutional cost affects firm decisions and efficiency in R&D investments.

Suggested Citation

  • Haizhou Huang & Chenggang Xu, 1998. "Financing Mechanisms and R&D Investment," William Davidson Institute Working Papers Series 180, William Davidson Institute at the University of Michigan.
  • Handle: RePEc:wdi:papers:1998-180
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    File URL: http://deepblue.lib.umich.edu/bitstream/2027.42/39567/3/wp180.pdf
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    Cited by:

    1. Chenggang Xu & Haizhou Huang, 1999. "Institutions, Innovations, and Growth," American Economic Review, American Economic Association, vol. 89(2), pages 438-443, May.
    2. Eric S. Maskin, 1999. "Recent Theoretical Work on the Soft Budget Constraint," American Economic Review, American Economic Association, vol. 89(2), pages 421-425, May.
    3. Carlin, Wendy & Mayer, Colin, 2003. "Finance, investment, and growth," Journal of Financial Economics, Elsevier, vol. 69(1), pages 191-226, July.
    4. Wendy Carlin & Colin Mayer, 2002. "International Evidence on Corporate Governance: Lessons for Developing Countries," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 11(suppl_1), pages 37-59, February.

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