Time inconsistent commercialization competitions

• Main Author: Zubchenko, Ganna
• Language: English
• Published: University of British Columbia 2012
• Online Access: http://hdl.handle.net/2429/42267

Business innovation is a powerful source of productivity increase and economic growth. Lack of financing at commercialization stages of innovation development often dooms socially valuable innovations to failure. To address pre-commercialization market failure, public agencies assist entrepreneurs with financial resources through commercialization competition mechanisms. Public agencies administering commercialization competitions may have dual objectives. Ex ante, they aim to induce entrepreneurs to invest an efficient amount of resources, accounting for resource costs and the associated expected social benefits. Ex post, commercialization awards should be allocated so that the expected social welfare aggregated across all projects is maximized. This would likely entail maximizing the number of socially valuable projects which are successfully commercialized. The objective of this thesis is to demonstrate that the ex ante and ex post objectives of a public agency may be in conflict. The ex ante award allocation criteria announced when the competition is launched may differ from the ex post award criteria retained by the agency as private information. Thus, agency decision-making may be time inconsistent. To achieve this objective, first, a theoretical model of commercialization competition was developed based on a real-world prototype, New Ventures Competition, administered by the British Columbia Innovation Council. It demonstrates that the competition causes underinvestment on the entrepreneurs’ side and allows the agency to deviate from ex ante announced award allocation criteria. Second, since time inconsistency is related to competition fairness, an experiment was conducted to determine whether respondents trade the competition fairness for “greater social good”. It was established that when respondents are aware of both entrepreneurs’ financial contributions to projects and their financial need, and when they are put into situation where maximization of social welfare is in conflict with maintaining ethical values, respondents tend to deviate from an allocation decision based on ex ante announced criteria. Third, it was established that when respondents face a particularly strong ethical trade-off, the higher the grades they received on average in their last year at school, the less they tend to change their original rankings to assist in the commercialization of comparatively lower quality projects at the expense of competition fairness.