Working Paper No. 776

Venture Capitalists, Asymmetric Information, and Ownership in the Innovation Process

Published: November 6, 2008Pages: 38Keywords: Venture Capitalists; Innovation; Entrepreneurs; Signaling; Development; M&AJEL-codes: C70; D21; D82; G24; L20; M13; O30
Published version

Venture Capitalists, Asymmetric Information, and Ownership in the Innovation Process Simona Fabrizi, Steffen Lippert, Pehr-Johan Norbäck and Lars Persson


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 rms is used as a signal to enhance the sale price of developed innovations, venture capitalists must be sufciently more ecient in selecting innovative projects than incumbents in order to exist in equilibrium. Otherwise, incumbents undertake early preemptive, acquisitions to prevent the venture-backed rms' signaling-driven investment, despite the risk of buying a bad innovation. We nally show at what point the presence of active venture capitalists increases the incentives for entrepreneurial innovations.

 

Pehr-Johan Norbäck

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Lars Persson

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lars.persson@ifn.se

Interdisciplinary European Studies

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This book explores the complex and ever-changing relationship between the European Union and its member states. The recent surge in tension in this relationship has been prompted by the actions of some member state governments as they question fundamental EU values and principles and refuse to implement common decisions seemingly on the basis of narrowly defined national interests.

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