Organization Of Innovation And Capital Markets
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, the author investigates the factors that determine when innovation is performed by venture-backed firms and when by large companies. To this end, the author develops a theoretical model in which development of new technologies and products requires the collaboration of researchers, executives, and suppliers of capital. The author focuses on the two-tier agency problem designed to provide simultaneously the right kinds of incentives for researchers and executives.