Crossing the Valley of Death: An R&D Race with Moral Hazard and Multiple Prizes

59 Pages Posted: 23 Apr 2020 Last revised: 3 Aug 2020

See all articles by Samuel Häfner

Samuel Häfner

Web3 Foundation; University of St. Gallen

Date Written: July 9, 2020


This paper analyzes moral hazard in market entry competition between externally funded firms. A finite number of entrepreneurs seek to advance their promising yet loss-making startups into a profitable market. Market entry requires a breakthrough opportunity, which may be obtained at a fixed and commonly known rate when engaging in costly R&D. Entrepreneurs are cash-constrained and rely on external funding. R&D is not contractible and entrepreneurs can choose to covertly divert some of the investors' funds to their own benefit instead. To overcome moral hazard, investors set deadlines up to which they provide funding. The profitable market may accommodate more than one firm. Early-mover advantages in the profitable market are linked to asymmetric deadlines, resulting in staggered exit from the race. Late-mover advantages tend to induce symmetric deadlines, leading to shakeouts. These comparative statics result from the interplay between a competition and a free-riding effect that arise from multiple prizes together with moral hazard.

Keywords: Continuous-Time Race, Multiple Prizes, Market Entry, External Funding, Moral Hazard, Multiple Principals

JEL Classification: C73, D86, O3

Suggested Citation

Häfner, Samuel, Crossing the Valley of Death: An R&D Race with Moral Hazard and Multiple Prizes (July 9, 2020). Available at SSRN: or

Samuel Häfner (Contact Author)

Web3 Foundation


University of St. Gallen ( email )

Varnbuelstr. 14
Saint Gallen, St. Gallen CH-9000

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