Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 776: Venture Capitalists, Asymmetric Information, and Ownership in the Innovation Process

Simona Fabrizi , Steffen Lippert , Pehr-Johan Norbäck () and Lars Persson ()
Additional contact information
Simona Fabrizi: Massey University Auckland, Postal: New Zeeland
Steffen Lippert: Massey University Auckland, Postal: New Zeeland
Pehr-Johan Norbäck: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden
Lars Persson: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden

Abstract: In this paper we construct a model in which entrepreneurial innovations are sold into oligopolistic industries and where adverse selection problems between entrepreneurs, venture capitalists and incumbents are present. We show that as exacerbated development by better-informed venture-backed firms is used as a signal to enhance the sale price of developed innovations, venture capitalists must be sufficiently more efficient in selecting innovative projects than incumbents in order to exist in equilibrium. Otherwise, incumbents undertake early preemptive, acquisitions to prevent the venture-backed firms' signaling-driven investment, despite the risk of buying a bad innovation. We finally show at what point the presence of active venture capitalists increases the incentives for entrepreneurial innovations.

Keywords: Venture Capitalists; Innovation; Entrepreneurs; Signaling; Development

JEL-codes: C70; D21; D82; G24; L20; M13; O30

38 pages, November 6, 2008

Full text files

wp776.pdf PDF-file 

Download statistics

Questions (including download problems) about the papers in this series should be directed to Elisabeth Gustafsson ()
Report other problems with accessing this service to Sune Karlsson ().

This page generated on 2018-01-23 23:34:36.