Why do firms sometimes choose to undertake their R&D by financing start-up companies, while other times they do it in their internal labs? We present a model where the choice of R&D is driven by information asymmetries on the quality of the project between the corporate venture capitalist and the idea owner. In an incomplete information environment, higher-quality projects are more likely to be developed by start-up firms, while low-quality ones are exploited internally. Also, two types of risk are examined, intrinsic quality risk and external shock risk. Riskier project quality and more difficult project monitoring make a project more likely to be developed as a new venture. Finally, the model is able to show why corporate lab scientists get most of their compensation as a fixed salary, while idea owner entrepreneurs working for start-up companies have a profit-sharing agreement. Copyright � 2007 The Authors; Journal compilation � 2007 Blackwell Publishing Ltd and The University of Manchester.
This paper provides an explanation for the common observation that higher income neighborhoods typically receive better public services compared with lower income neighborhoods. Intuitively, one might expect that lower income groups, which usually form the voting majority of cities, would object to an unfair allocation of this nature. Wealthy individuals, however, have the option of moving to the suburbs. As we learn from the tax competition literature, mobile factors are generally able to command a premium. Since institutional constraints prevent regressive taxation and public goods are by definition consumed in equal quantity by all agents, only public services remain as an instrument for municipalities to use to keep wealthy agents in their tax base. We show that both rich and poor agents benefit from this differential access to public services and explore how factors like the ratio of rich to poor and the differences between their incomes affect the equilibrium allocation.
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