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Drugov, Mikhail and Macchiavello, Rocco (2014) Financing experimentation. American Economic Journal : Microeconomics , Volume 6 (Number 1). pp. 315-349. doi:10.1257/mic.6.1.315 ISSN 1945-7669.
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Official URL: http://dx.doi.org/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 micro-credit schemes) are shown to be part of the optimal contract.
Item Type: | Journal Article | ||||
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Subjects: | H Social Sciences > HG Finance | ||||
Divisions: | Faculty of Social Sciences > Economics | ||||
Library of Congress Subject Headings (LCSH): | Entrepreneurship, Moral hazard, Corporations -- Finance | ||||
Journal or Publication Title: | American Economic Journal : Microeconomics | ||||
Publisher: | American Economic Association | ||||
ISSN: | 1945-7669 | ||||
Official Date: | February 2014 | ||||
Dates: |
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Volume: | Volume 6 | ||||
Number: | Number 1 | ||||
Page Range: | pp. 315-349 | ||||
DOI: | 10.1257/mic.6.1.315 | ||||
Status: | Peer Reviewed | ||||
Publication Status: | Published | ||||
Access rights to Published version: | Restricted or Subscription Access | ||||
Date of first compliant deposit: | 27 December 2015 | ||||
Date of first compliant Open Access: | 27 December 2015 |
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