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Financing Experimentation

  • Macchiavello, Rocco

    (Department of Economics, University of Warwick)

Entrepreneurs 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: D81 ; D86 ; G30

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2013/twerp_1025_macchiavello.pdf
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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 1025.

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Date of creation: 2013
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Handle: RePEc:wrk:warwec:1025
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