Taking Care: How Concerns About Prior Knowledge Affect the Financing of Novel Projects

27 Pages Posted: 3 Sep 2001

See all articles by Amar Bhide

Amar Bhide

Harvard University - Business School (HBS)

Date Written: October 22, 2003

Abstract

Agents may propose bad projects because they unwittingly rely on defective prior knowledge. Concern about these honest mistakes encourages principals to examine track records of the agents' use of the same prior knowledge. But, such track records cannot exist for novel projects (or routine projects proposed under novel circumstances). Therefore agents may fail to obtain outside financing. This argument helps explain why highly novel ventures that are initially self-financed can subsequently attract outside financing without any decrease in standard 'incentive' or moral hazard problems. It also provides new insights about the differences in the novelty and other attributes of projects financed by individual 'angel' investors, venture capital partnerships and large public companies.

Note: Previously titled "Taking Care: How Efforts to Control Oblivious Ignorance Affect Investment Decisions"

Keywords: Error control; Governance; Joint action; Organizational structure; Innovation

JEL Classification: G30, G31, L11, L20, M13, M40, M46, O31

Suggested Citation

Bhide, Amar, Taking Care: How Concerns About Prior Knowledge Affect the Financing of Novel Projects (October 22, 2003). Available at SSRN: https://ssrn.com/abstract=281687 or http://dx.doi.org/10.2139/ssrn.281687

Amar Bhide (Contact Author)

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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