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https://ssrn.com/abstract=2187931
 
 

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Innovation Policies


Ramana Nanda


Harvard University - Entrepreneurial Management Unit

Matthew Rhodes-Kropf


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

January 1, 2017

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

Abstract:     
Past work has shown that failure tolerance by principals has the potential to stimulate innovation, but has not examined how this affects which pro- jects principals will start. We demonstrate that failure tolerance has an equilibrium price ― in terms of an investor's required share of equity ― that increases in the level of experimentation. Financiers with investment strategies that tolerate early failure will endogenously choose to fund less radical innovations, while the most experimental projects (for whom the price of failure tolerance is too high) can only be started by investors who are not failure tolerant. Since policies to stimulate innovation must often be set before specific investments in innovative projects are made, this creates a tradeoff between a policy that encourages experimentation ex-post and one that funds experimental projects ex-ante. In equilibrium it is possible that all competing financiers choose to offer failure tolerant contracts to attract entrepreneurs, leaving no capital to fund the most radical, experimental projects in the economy. The impact of different innovation policies can help to explain who finances radical innovations, and when and where radical innovation occurs.

Number of Pages in PDF File: 52

Keywords: Financing Innovation, Failure Tolerance, Abandonment Options

JEL Classification: G24, O31


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Date posted: December 11, 2012 ; Last revised: February 4, 2017

Suggested Citation

Nanda, Ramana and Rhodes-Kropf, Matthew, Innovation Policies (January 1, 2017). Harvard Business School Entrepreneurial Management Working Paper No. 13-038. Available at SSRN: https://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
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