Too Talented to Innovate? Dynamic Entrepreneurial Reputation, Project Selection and Welfare

49 Pages Posted: 24 Aug 2016 Last revised: 24 Jan 2017

See all articles by Noam Shamir

Noam Shamir

Tel-Aviv University

David Zvilichovsky

Coller School of Management Tel Aviv University

Date Written: January 24, 2017

Abstract

This paper integrates entrepreneurial reputation into a multi-period model which explores the financing and execution of heterogeneous projects under asymmetric information. We study a model where reputation can be acquired following a history of successful execution but may also be inferred from project selection. We explore the effect of reputational considerations and the distribution of available projects on project selection and welfare. Under certain conditions, talented entrepreneurs may signal their ability by choosing to forgo projects, even when such projects generate positive expected returns. Our results highlight the role of low-NPV projects, which require less financing capital, in generating reputation and facilitating strategic separation. We show that a small change in the availability of such low-NPV projects may generate a significant increase in welfare.

Keywords: Entrepreneurship, Reputation, Asymmetric Information, Venture Financing, Project Selection

JEL Classification: L14, L26, D82, D92

Suggested Citation

Shamir, Noam and Zvilichovsky, David, Too Talented to Innovate? Dynamic Entrepreneurial Reputation, Project Selection and Welfare (January 24, 2017). Available at SSRN: https://ssrn.com/abstract=2827205 or http://dx.doi.org/10.2139/ssrn.2827205

Noam Shamir

Tel-Aviv University ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel

David Zvilichovsky (Contact Author)

Coller School of Management Tel Aviv University ( email )

Tel Aviv University
Ramat Aviv, Tel Aviv, 69978
Israel

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