The financing and organisation of innovative firms
This thesis investigates the financing and organisation of innovative firms and consists of three substantive chapters. Chapter 2 analyses the optimal financing arrangement when weak property rights allow an investor to transfer one entrepreneur's knowledge to another of his portfolio entrepreneurs. It shows that the optimal contract induces disclosure if and only if it is socially efficient. Next, it analyses the impact of the strength of property rights on project surplus and argues that this relationship may be non-monotonic. In particular, the expected value of risky projects may be negatively related to stronger property rights. Two extensions consider the impact of the investor's disclosure threat on the closeness of the financing relationship as well as the optimal size of the investor's portfolio. Chapter 3 argues that a commitment to 'shallow pockets', namely by limiting the size of funds raised initially, may improve an investor's ability to deal with entrepreneurial agency problems. Shallow pockets allow the investor to create competition for continuation finance between her portfolio entrepreneurs. Although this increases the investor's ex post bargaining power vis-a-vis entrepreneurs financed by her, we show that it can nevertheless improve ex ante effort incentives as well as allow sorting across entrepreneurial types, when neither of which can be achieved through contractual means. Chapter 4 considers two agents who form a research partnership and derives the optimal communication policy within the partnership. Although communication by an agent reduces her bargaining power during interim renegotiations, it may nevertheless increase expected returns to the agent if it increases her partner's research incentives. This will be the case if the two agents' research paths are sufficiently complementary. As a result, chapter 4 suggests a role for communication in the absence of spillovers considered in the existing literature.