Entrepreneurial Optimism in the Market for Technological Inventions


How do potentially optimistic entrepreneurs attract prospective investors? We investigate an entrepreneur’s decision to pursue either disclosure?where investors inspect the invention?or a contingent payment scheme (CPS) offer (e.g., salary deferral, royalty-based license)?where an invention’s value is inferred from the entrepreneur’s willingness to make her pay contingent on the invention’s success. Using a parsimonious model, we highlight the role of optimism and demonstrate that it only affects CPS ex post. As a result, a novel trade-off unfolds ex ante: In choosing an action that maximizes the valuation of the invention, a moderately wealthy entrepreneur weighs optimism discount (affecting CPS) versus imitation discount (affecting disclosure). More broadly, the paper advances a view of entrepreneurs as optimists, thus departing from the prevailing approach, which characterizes entrepreneurs as opportunistic individuals who consciously pursue self-serving goals.

Journal or Publication:
Organization Science
Authors:
Gary Dushnitsky
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Status:
publish
Year Published
2009
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