Entrepreneurial Optimism in the Market for Technological Inventions

Abstract

How do potentially optimistic entrepreneurs attract prospective investors? We investigate an entrepreneur's decision to pursue either disclosure - where investors inspect the invention - or a contingent payment scheme (CPS) offer (e.g., salary deferral, royalty-based license) - where an invention's value is inferred from the entrepreneur's willingness to make her pay contingent on the invention’s success. Using a parsimonious model, we highlight the role of optimism and demonstrate that it only affects CPS ex-post. As a result, a novel trade-off unfolds ex-ante: In choosing an action that maximizes the valuation of the invention, a moderately wealthy entrepreneur weighs optimism discount (affecting CPS) versus imitation discount (affecting disclosure). More broadly, the paper advances a view of entrepreneurs as optimists, thus departing from the prevailing approach, which characterizes entrepreneurs as opportunistic individuals who consciously pursue self-serving goals.