Document Type
Discussion Paper
Publication Date
1-1-2001
CFDP Number
1292R
CFDP Revision Date
2004-10-01
CFDP Pages
50
Abstract
This paper considers 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 trade-off in the choice of financing modes is between lack of commitment with relationship financing and information rents with arm’s length financing.
Recommended Citation
Bergemann, Dirk and Hege, Ulrich, "The Financing of Innovation: Learning and Stopping" (2001). Cowles Foundation Discussion Papers. 1546.
https://elischolar.library.yale.edu/cowles-discussion-paper-series/1546