TY  - CHAP
AB  - Abstract Past work has shown that failure tolerance by principals has the potential to stimulate innovation, but has not examined how this affects which projects principals will start. We demonstrate that failure tolerance has an equilibrium price – in terms of an investor’s required share of equity – that increases in the level of radical innovation. Financiers with investment strategies that tolerate early failure will endogenously choose to fund less radical innovations, while the most radical innovations (for whom the price of failure tolerance is too high) can only be started by investors who are not failure tolerant. Since policies to stimulate innovation must often be set before specific investments in innovative projects are made, this creates a trade-off between a policy that encourages experimentation ex post and the one that funds experimental projects ex ante. In equilibrium, it is possible that all competing financiers choose to offer failure tolerant contracts to attract entrepreneurs, leaving no capital to fund the most radical, experimental projects in the economy. The impact of different innovation policies can help to explain who finances radical innovations, and when and where radical innovation occurs.
VL  - 37
SN  - 978-1-78743-080-8, 978-1-78743-079-2/0742-3322
DO  - 10.1108/S0742-332220170000037002
UR  - https://doi.org/10.1108/S0742-332220170000037002
AU  - Nanda Ramana
AU  - Rhodes-Kropf Matthew
PY  - 2017
Y1  - 2017/01/01
TI  - Innovation Policies☆
T2  - Entrepreneurship, Innovation, and Platforms
T3  - Advances in Strategic Management
PB  - Emerald Publishing Limited
SP  - 37
EP  - 80
Y2  - 2024/04/23
ER  -