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Working Paper No. 926

Why Entrepreneurs Choose Risky R&D Projects – But Still Not Risky Enough

Working Paper
Färnstrand Damsgaard, Erika, Pehr-Johan Norbäck, Lars Persson and Helder Vasconcelos (2012). “Why Entrepreneurs Choose Risky R&D Projects – But Still Not Risky Enough”. IFN Working Paper No. 926. Stockholm: Research Institute of Industrial Economics (IFN).

Erika Färnstrand Damsgaard, Pehr-Johan Norbäck, Lars Persson, Helder Vasconcelos

Entrepreneurs face higher commercialization costs than incumbents. We show that this implies that entrepreneurs will choose more risky projects than incumbents, aiming to reduce their high expected marginal commercialization cost. However, entrepreneurs may select too safe projects from a social point of view, since they do not internalize the business stealing effect. We also show that commercialization support induces entrepreneurship but may lead to mediocre entrepreneurship by inducing entrepreneurs to choose less risky projects, whereas R&D support encourages entrepreneurship without affecting the type of entrepreneurship. Using Swedish patent citation data, we find empirical support for predictions of the model.

Pehr-Johan Norbäck

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