Orman, Cuneyt (2008): Organization of Innovation and Capital Markets.
This is the latest version of this item.
Download (323kB) | Preview
There has been an explosion of innovation backed by venture capital since late 1970’s. Nonetheless, a great deal of innovation still occurs within large companies. In this paper, I investigate the factors that determine when innovation is performed by venture-backed firms and when by large companies. To this end, I develop a theoretical model in which development of new technologies and products requires the collaboration of researchers, executives, and suppliers of capital. I focus on the two-tier agency problem designed to provide simultaneously the right kinds of incentives for researchers and executives. I find that if capital markets function perfectly, it is optimal for innovation to be conducted by venture-backed firms: Specialization implicit in venture form of organization mitigates two-tier agency problems. If capital markets are sufficiently imperfect, however, it is optimal for innovation to be performed by large companies: they can use cheaper internal funds to finance innovation. I finally point to the role of policy in improving capital markets and hence innovation performance.
|Item Type:||MPRA Paper|
|Original Title:||Organization of Innovation and Capital Markets|
|Keywords:||Innovation, Organizational Form, Financial Imperfections, Venture Capital|
|Subjects:||D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory
D - Microeconomics > D2 - Production and Organizations
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design
O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O32 - Management of Technological Innovation and R&D
G - Financial Economics > G2 - Financial Institutions and Services > G24 - Investment Banking ; Venture Capital ; Brokerage ; Ratings and Ratings Agencies
|Depositing User:||Cuneyt Orman|
|Date Deposited:||26. Jun 2010 17:53|
|Last Modified:||31. Dec 2015 18:16|
Aghion, P., and J. Tirole (1994): “The Management of Innovation,” Quarterly Journal of Economics, 109, 1185–1209.
Aghion, P., and J. Tirole (1997): “Formal and Real Authority in Organizations,” Journal of Political Economy, 105, 1–29.
Anand, B., and A. Galetovic (2000): “Weak Property Rights and Holdup in R&D,” Journal of Economics& Management Strategy, 9, 615–42.
Bernanke, B., and M. Gertler (1989): “Agency Costs, Net Worth, and Business Fluctuations,” American Economic Review, 79, 14–31.
Bottazzi, L. (2004): “R&D and the Financing of Ideas in Europe,” CEPS Working Document.
Bottazzi, L., and M. Da Rin (2003): “Financing Entrepreneurial Firms in Europe: Facts, Issues, and Research Agenda,” CEPR Discussion Papers.
Demirguc-Kunt, A., and R. Levine (2008): “Finance, Financial Sector Policies, and Long-run Growth,” Policy Research Working Paper Series 4469, The World Bank.
Gompers, P., and J. Lerner (2006): The Venture Capital Cycle. The MIT Press, Cambridge, Massachusets.
Grossman, S. J., and O. D. Hart (1983): “An Analysis of the Principal-Agent Problem,” Econometrica, 51, 7–45.
Hellmann, T. (1998): “A Theory of Corporate Venture Investing,” Working Paper.
Hellmann, T., and M. Puri (1998): “The Interaction Between Product Market and Financing Strategy: The Role of Venture Capital,” Review of Financial Studies, 13, 959–984.
Hirukawa, M., and M. Ueda (2008): “Venture Capital and Industrial “Innovation”,” CEPR Discussion Paper.
Holmstrom, B. (1979): “Moral Hazard and Observability,” Bell Journal of Economics, 10, 74–91.
Holmstrom, B. (1989): “Agency Costs and Innovation,” Journal of Economic Behavior and Organization, 12, 305–327.
Hubbard, R. G. (1998): “Capital Market Imperfections and Investment,” Journal of Economic Literature, 36, 193–225.
Jensen, M. C. (1993): “The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems,,” Journal of Finance, 48, 831–880.
Kiyotaki, N., and J. Moore (1997): “Credit Cycles,” Journal of Political Economy, 105, 211–248.
Kortum, S., and J. Lerner (2000): “Assessing the Contribution of Venture Capital to Innovation,” Rand Journal of Economics, 31, 674–692.
Macho-Stadler, J., and D. Perez-Castrillo (1998): “Centralized and Decentralized Contracts in a Moral Hazard Environment,” Journal of Industrial Economics, 46, 489–510.
Melumad, N. D., D. Mookherjee, and S. Reichelstein (1995): “Hierarchical Decentralization of Incentive Contracts,” Rand Journal of Economics, 26, 654–72.
Merges, R. P. (1999): “The Law and Economics of Employee Invention,” Harvard Journal of Law & Technology, 13.
Orman, C. (2008): “Essays on Financial Markets and Regulations,” Unpublished Ph.D. dissertation, University of Minnesota.
Poterba, J. (1989): “Venture Capital and Capital Gains Taxation,” NBER.
Radner, R. (1993): “The Organization of Decentralized Information Processing,” Econometrica, 61, 1109–1146.
Rajan, R., and L. Zingales (1998): “Financial Dependence and Growth,” American Economic Review, 88, 559–86.
Rajan, R., and L. Zingales (2003a): “Banks and Markets: The Changing Character of European Finance,” in The Transformation of the European Financial System, ed. by V. Gaspar, P. Hartrmann, and O. Sleijpen. European Central Bank.
Rajan, R., and L. ZingalesS (2003b): “The Great Reversals: The Politics of Financial Development in the 20th Century,” Journal of Financial Economics, 69, 5–50.
Romain, A., and B. Van Pottelsberghe (2004): “The Economic Impact of Venture Capital,” Deutsche Bundesbank Discussion Paper.
Rotemberg, J. J., and G. Saloner (1994): “Benefits of Narrow Business Strategies,” American Economic Review, 84, 1330–1349.
Sah, R. K., and J. E. Stiglitz (1986): “The Architecture of Economic Systems: Hierarchies and Polyarchies,” American Economic Review, 76, 716–727.
Sahlman, W. A. (1990): “The Structure and Governance of Venture Capital Organizations,” Journal of Financial Economics, 27, 473–521.
Sandrock, S. P. (1983): “The Evolution and Modern Application of the Shop Right Rule,” The Business Lawyer, 38, 953–974.
Shleifer, A., and R. W. Vishny (1997): “A Survey of Corporate Governance,” Journal of Finance, 52, 737–783.
Stein, J. (1997): “Internal Capital Markets and the Competition for Corporate Resources,” Journal of Finance, 52, 111–33.
Stiglitz, J. E., and A. Weiss (1981): “Credit Rationing in Markets with Imperfect Information,” American Economic Review, 71, 393–410.
Tykvova, T. (2000): “Venture Capital in Germany and its Impact on Innovation,” SSRN Working Paper.
Available Versions of this Item
Organization of Innovation and Capital Markets. (deposited 22. May 2010 22:33)
Organization of Innovation and Capital Markets. (deposited 25. May 2010 11:38)
- Organization of Innovation and Capital Markets. (deposited 26. Jun 2010 17:53) [Currently Displayed]
- Organization of Innovation and Capital Markets. (deposited 25. May 2010 11:38)