Resource Allocation Among Competing Innovators

HKUST IEMS Thought Leadership Briefs No. 46

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Yangguang (Sunny) Huang

Venture capitals (VC) and public funding authorities need to carefully consider the incentive issues of entrepreneurs when providing support. In allocating resources to potentially competing innovators, there is a trade-off between the risk of innovation failure and rent dissipation: Diverse investment lowers the risk of having no successful innovation but also reduces the expected profit from the post-innovation market. Successful innovation requires both abundant resources and effort exerted by innovators. Lack of resources or excessive competition discourages innovators from exerting effort at the innovation stage.When resources are scarce, a concentrated investment can guarantee active. As resources become abundant, diverse investment increases the overall success rate of innovation but eventually results in strong business-stealing effort among successful innovators. Therefore, the optimal diversification of investment exhibits a nonmonotone pattern.
 

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About the author

Yangguang (Sunny) Huang an Assistant Professor of Economics at the Hong Kong University of Science and Technology. He is also a Faculty Associate of HKUST IEMS. More >> 

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