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Patent Signaling of Startups Can Be Less Effective under Coarse Information

Title
Patent Signaling of Startups Can Be Less Effective under Coarse Information
Authors
HAHN, GUANGSUGKWON, JOON YEOP
Date Issued
Aug-2019
Publisher
Korea Financial Association
Abstract
A startup may have little track record and investors may not have the exact information about an entrepreneur’s true success probability. To model this, we consider a patent signaling model for startup financing where the entrepreneur signals his type by acquiring patents at his own cost and investors have coarse information about the entrepreneur’s true success probability. Rather than having the exact information about each type’s true success probability, investors only perceive the ranges of the entrepreneur’s possible success probabilities. Adopting perfect Bayesian equilibrium (PBE) as a solution concept, we consider only pure-strategy separating and pooling PBEs of the signaling game between the entrepreneur and investors. By invoking an extension of Cho and Kreps’ (1987) Intuitive Criterion adapted to our model, we obtain the unique least-cost perfect Bayesian equilibrium. In the refined equilibrium, as investors consider a higher success probability of each type, it takes more equity share. Furthermore, a high-type entrepreneur may get a smaller equity share despite of acquiring a higher level of patent than in the benchmark where investors know the exact possible success probabilites of the entrepreneur. This implies that coarse information faced by investors may lead to less effective patent-signaling than in the benchmark.
URI
http://oasis.postech.ac.kr/handle/2014.oak/100484
ISSN
1229-0351
Article Type
Article
Citation
Asian Review of Financial Research, vol. 32, no. 3, page. 401 - 417, 2019-08
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한광석HAHN, GUANGSUG
Div of Humanities and Social Sciences
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