Financing Experimentation

Entrepreneurs must experiment to learn how good they are at a new activity. What happens when the experimentation is Önanced 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 Önancing experimentation can become harder precisely when it is more proÖtable, 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.


Issue Date:
2013-03
Publication Type:
Working or Discussion Paper
DOI and Other Identifiers:
Record Identifier:
https://ageconsearch.umn.edu/record/270434
Language:
English
JEL Codes:
D81; D86; G30
Series Statement:
WERP 1025




 Record created 2018-04-02, last modified 2020-10-28

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