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Financing experimentation

Drugov, Mikhail and Macchiavello, Rocco (2014) Financing experimentation. American Economic Journal: Microeconomics, 6 (1). pp. 315-349. ISSN 1945-7669

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Identification Number: 10.1257/mic.6.1.315

Abstract

Entrepreneurs must experiment to learn how good they are at a new activity. What happens when the experimentation is financed by a lender? Under common scenarios, i.e., when there is the opportunity to learn by "starting small" or when "noncompete" clauses cannot be enforced ex post, we show that financing experimentation can become harder precisely when it is more profitable, i.e., for lower values of the known arm and for more optimistic priors. Endogenous collateral requirements (like those frequently observed in microcredit schemes) are shown to be part of the optimal contract.

Item Type: Article
Official URL: https://www.aeaweb.org/journals/mic
Additional Information: © 2014 American Economic Association
Divisions: Management
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
H Social Sciences > HF Commerce
JEL classification: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information
G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L25 - Firm Performance: Size, Diversification and Scope, Age, Profit, and Sales
Sets: Departments > Management
Date Deposited: 03 Nov 2016 14:09
Last Modified: 20 Mar 2019 02:34
URI: http://eprints.lse.ac.uk/id/eprint/68219

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