The Financing of Innovation: Learning and Stopping

Posted: 10 Nov 2009

See all articles by Dirk Bergemann

Dirk Bergemann

Yale University - Cowles Foundation - Department of Economics; Yale University - Cowles Foundation

Ulrich Hege

Toulouse School of Economics; European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: 2005


We consider the financing of a research projectunder uncertainty about the time of completion and the probability of eventualsuccess. We distinguish between two financing modes, namely relationshipfinancing, where the allocation decision of the entrepreneur is observable, andarm's-length financing, where it is unobservable. We find that equilibrium funding stops altogether too early relative to theefficient stopping time in both financing modes. The rate at which funding isreleased becomes tighter over time under relationship financing, and looserunder arm's-length financing. The tradeoff in the choice of financing modes isbetween lack of commitment with relationship financing and information rentswith arm's-length financing. (Publication abstract)

Keywords: R&D, Information asymmetry, Uncertainty, Commitment, Interpersonal relations, Angel investors, Conflict management, Financing, Rates of return

Suggested Citation

Bergemann, Dirk and Hege, Ulrich, The Financing of Innovation: Learning and Stopping (2005). RAND Journal of Economics, Vol. 36, Issue 4, p. 719-752 2005. Available at SSRN:

Dirk Bergemann (Contact Author)

Yale University - Cowles Foundation - Department of Economics ( email )

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Yale University - Cowles Foundation

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United States

Ulrich Hege

Toulouse School of Economics ( email )

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Toulouse Cedex, F-31042
+33 5 61 12 86 01 (Phone)

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European Corporate Governance Institute (ECGI)

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