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  3. American Economic Journal: Microeconomics
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  5. Aggressive Pivots and Entrepreneurial Skill

American Economic Journal:
Microeconomics

ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)

Aggressive Pivots and Entrepreneurial Skill

  • Xuelin Li
  • Martin Szydlowski
American Economic Journal: Microeconomics (Forthcoming)

Abstract

We study pivots as signaling devices in a dynamic experimentation model. An entrepreneur receives funding from an investor and has private information about a project, which requires costly experimentation to succeed. The entrepreneur has a real option to pivot, i.e. to abandon the project and to start a new one. Investors learn about the project from the arrival of exogenous information and from the entrepreneur’s pivoting decisions. We characterize signaling equilibria in which high skill entrepreneurs pivot early. Such early pivots are associated with higher likelihood of success and with more favorable funding terms following the pivot.

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