Patent Signaling of Startups Can Be Less Effective under Coarse Information
- Patent Signaling of Startups Can Be Less Effective under Coarse Information
- HAHN, GUANGSUG; KWON, JOON YEOP
- Date Issued
- Korea Financial Association
- 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.
- Article Type
- Asian Review of Financial Research, vol. 32, no. 3, page. 401 - 417, 2019-08
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