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The Financing of Innovation : Learning and Stopping

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  • Bergemann, D.
  • Hege, U.

    (Tilburg University, Center For Economic Research)

Abstract

We consider the financing of a research project under uncertainty about the time of completion and the probability of eventual success. We distinguish between two financing modes, namely relationship financing, where the allocation decision of the entrepreneur is observable, and arm's-length financing, where it is unobservable. We find that equilibrium funding stops altogether too early relative to the efficient stopping time in both financing modes. The rate at which funding is released becomes tighter over time under relationship financing, and looser under arm's-length financing. The tradeoff in the choice of financing modes is between lack of commitment with relationship financing and information rents with arm's-length financing.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Bergemann, D. & Hege, U., 2001. "The Financing of Innovation : Learning and Stopping," Discussion Paper 2001-16, Tilburg University, Center for Economic Research.
    • Handle: RePEc:tiu:tiucen:85bb8c47-af02-4c41-88b4-0a7e831cee66
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    More about this item

    Keywords

    innovation; finance; venture capital; learning;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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