Abstract

http://ssrn.com/abstract=2187931
 
 

References (49)



 
 

Footnotes (17)



 


 



Innovation and the Financial Guillotine


Ramana Nanda


Harvard University - Entrepreneurial Management Unit

Matthew Rhodes-Kropf


Harvard Business School - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER)

Novembr 26, 2012

Harvard Business School Entrepreneurial Management Working Paper No. 13-038

Abstract:     
We examine how investors' tolerance for failure impacts the types of projects they are willing to fund. We show that actions that reduce short term accountability and thus encourage agents to experiment more simultaneously reduce the level of experimentation financial backers are willing to fund. Failure tolerance has an equilibrium price that increases in the level of experimentation. More experimental projects that don't generate enough to pay the price cannot be started. In fact, an endogenous equilibrium can arise in which all competing financiers choose to be failure tolerant in the attempt to attract entrepreneurs, leaving no capital to fund the most radical, experimental projects in the economy. The tradeoff between failure tolerance and a sharp guillotine help explain when and where radical innovation occurs.

Number of Pages in PDF File: 48

Keywords: Innovation, Venture Capital, Investing, Abandonment Option, Failure Tolerance

JEL Classification: G24, O31

working papers series


Download This Paper

Date posted: December 11, 2012  

Suggested Citation

Nanda, Ramana and Rhodes-Kropf, Matthew, Innovation and the Financial Guillotine (Novembr 26, 2012). Harvard Business School Entrepreneurial Management Working Paper No. 13-038. Available at SSRN: http://ssrn.com/abstract=2187931 or http://dx.doi.org/10.2139/ssrn.2187931

Contact Information

Ramana Nanda (Contact Author)
Harvard University - Entrepreneurial Management Unit ( email )
Boston, MA 02163
United States
HOME PAGE: http://www.people.hbs.edu/rnanda
Matthew Rhodes-Kropf
Harvard Business School - Entrepreneurial Management Unit ( email )
Soldiers Field Road
Rock Center 312
Boston, MA 02163
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Feedback to SSRN


Paper statistics
Abstract Views: 692
Downloads: 144
Download Rank: 108,253
References:  49
Footnotes:  17
Paper comments
No comments have been made on this paper

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo8 in 3.125 seconds