Macchiavello, Rocco (2013) Financing experimentation. Working Paper. Coventry, UK: Department of Economics, University of Warwick. Warwick economics research papers series (TWERPS), Volume 2013 (Number 1025).

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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
"no-compete" clauses cannot be enforced ex-post, we show that financing experi-
mentation 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 micro-credit schemes) are shown to
be part of the optimal contract.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HD Industries. Land use. Labor H Social Sciences > HG Finance
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Economics -- Mathematical models , Competition , Loans , Businesspeople
Series Name:	Warwick economics research papers series (TWERPS)
Publisher:	Department of Economics, University of Warwick
Place of Publication:	Coventry, UK
Official Date:	March 2013
Dates:	Date Event March 2013 Published
Volume:	Volume 2013
Number:	Number 1025
Number of Pages:	44
Institution:	University of Warwick
Status:	Not Peer Reviewed
Publication Status:	Published
URI:	http://wrap.warwick.ac.uk/id/eprint/59358

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