Finance and Schumpterian Rents: On the Timing of Innovation

27 Pages Posted: 7 Jun 2011 Last revised: 27 Jan 2012

See all articles by Chris Yung

Chris Yung

University of Virginia - McIntire School of Commerce

Date Written: June 6, 2011

Abstract

I model an innovation game in which firms can choose to be leaders or followers. Internal finance leads to a stalemate in which each firm wants to free-ride on the others' experimentation costs. Therefore, no innovation occurs. When instead firms compete in the capital markets to finance innovation (e.g., in the case of venture capital) there is an endogenous cost to delay. Waiting to make risky irreversible investment conveys pessimist information. I characterize the relative sizes of waves of leaders and followers in innovation cycles - and the endogenous, intertemporal distribution of quality as each wave builds and crashes - as a function of the risk of the innovation and the amount of external finance required.

Keywords: innovation, entrepreneurship, venture capital, adverse selection, cycles

JEL Classification: E32, E44, E51, G21

Suggested Citation

Yung, Chris, Finance and Schumpterian Rents: On the Timing of Innovation (June 6, 2011). Available at SSRN: https://ssrn.com/abstract=1858892 or http://dx.doi.org/10.2139/ssrn.1858892

Chris Yung (Contact Author)

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States
434-242-0836 (Phone)

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