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Can Starving Start‐ups Beat Fat Labs? A Bandit Model of Innovation with Endogenous Financing Constraint *
Author(s) -
Spiganti Alessandro
Publication year - 2020
Publication title -
the scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/sjoe.12333
Subject(s) - novelty , principal (computer security) , outcome (game theory) , economics , finance , principal–agent problem , constraint (computer aided design) , private capital , microeconomics , business , actuarial science , computer science , engineering , production (economics) , computer security , mechanical engineering , corporate governance , philosophy , theology
Is there any such thing as too much capital when it comes to the financing of innovative projects? We study a principal–agent model in which the principal chooses the scale of the experiment, and the agent privately observes the outcome realizations and can privately choose the novelty of the project. When the agent has private access to a safe but non‐innovative project, the principal starves the agent of funds to incentivize risk‐taking. The principal quickly scales up after early successes, and can tolerate early failures. If the principal is equally informed about the outcome, then the agent is well‐resourced, resembling a large research and development department.