Paper Title: Money, Time, and Grant Design

The design of research grants might be a useful tool for incentivizing more socially valuable science. To better understand the value of grant design as a policy instrument, we conduct two sets of thought experiments in a nationally representative survey of academic researchers. First, we test whether grants with randomized attributes induce different research strategies. Longer grants increase researchers’ willingness to take risks, but only amongst tenured professors, suggesting that job security and grant duration are complementary incentives. Larger grants increase researchers’ willingness to expand ongoing projects, while smaller grants increase researchers’ focus on starting new projects. In our second experiment, we estimate researchers’ willingness to trade off grant size and duration. We find that researchers are relatively unwilling to trade off the amount of funding a grant provides in order to extend the duration of the grant — more money is much more valuable than more time.

Presenter: Wei Yang Tham (Harvard)

Coauthors: Kyle Myers (Harvard)

Discussant: Carolyn Stein (UC Berkeley)

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September 25, 2023

Paper: Do Investors Overvalue Startups? Evidence from the Junior Stakes of Mutual Funds (pdf)

We show that mutual funds report their junior stakes in startups at 43% higher valuation than model fair values that consider multi-tier capital structures of startups. The latest-issued and most senior security is worth 48% per share than junior securities held by mutual funds, implying that mutual funds mark junior securities close to par with the senior securities. Our findings are robust to model assumptions. Identical valuations reported for dual holdings of senior and junior securities imply 37% discrepancy in implied values of the firm. Overvaluation is lower for fund families with longer experience in private startup investments, and higher for junior securities purchased in secondary transactions. Overvaluation declines after down rounds (new financing rounds with purchase prices lower than previous rounds) and near IPOs. The results are consistent with mutual funds neglecting the probability of negative outcomes in which junior securities are paid less than senior securities and overweighting successful exits where all securities convert to common equity and are valued equally.

Presenter: Ayako Yasuda (UC Davis)

Coauthors: Vikas Agarwal, Brad M. Barber, Si Cheng, Allaudeen Hameed and Harshini Shanker

Discussant: Minmo Gahng (Cornell)

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Title: “Early exposure to entrepreneurship and the creation of female entrepreneurs”

Using registry data from Denmark, we track the educational and professional choices of one million individuals from adolescence to adulthood and investigate the effects of early exposure to entrepreneurs on the gender gap and the allocation of talent in entrepreneurship. We exploit within-school, across-cohort variation in adolescents’ exposure to entrepreneurship, as measured by the share of their peers whose parents are entrepreneurs during the last years of compulsory schooling. We find that higher exposure to entrepreneurs during adolescence narrows gender gaps in entrepreneurship by encouraging girls’ entry and tenure into this profession. The effect is driven by exposure to the parents of female peers and works via a decrease in girls’ likelihood to discontinue education at the end of compulsory schooling and to hold low-paying jobs as adults. The firms created by women are larger and survive longer than the average firm, indicating that a pool of innately talented entrepreneurs are not pursuing their comparative advantage due to gender-specific entry barriers. Our results suggest that such barriers are both cultural and informational in nature and that raising women’s early exposure to entrepreneurship from the 25th to the 75th percentile would increase the total number of jobs created by entrepreneurs by 5.3%.

Presenter: Viola Salvestrini (Queen Mary University of London)

Coauthors: Mikkel Baggesgaard Mertz (Queen Mary University of London) and Maddalena Ronchi (Bocconi University)

Discussant: Kristoph Kleiner (Indiana University)

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Title: “How Much Do Small Businesses Rely on Personal Credit?”

This paper estimates the degree of substitution between personal and small business credit for U.S. entrepreneurs between 2009 and 2018 using a novel, individual-level dataset. We identify the effect of business credit supply shocks by exploiting geographic variation in the market share of large banks, which sharply reduced credit supply to small businesses after the 2008 financial crisis. This contraction decreased total business credit by $13,572 per firm in our sample, and we find that entrepreneurs were able to substitute for about 68% of this decline with personal credit, driven by mortgages. Entrepreneurs with subprime credit scores, below-average income, and high credit utilization do not substitute lost business credit with personal credit. Thus, we find that the personal financial characteristics of entrepreneurs meaningfully affect overall access to external finance for small businesses.

Presenter: Julia Fonseca (University of Illinois Urbana-Champaign)

Coauthors: Jialan Wang (University of Illinois Urbana-Champaign and NBER)

Discussant: Manuel Adelino (Duke University)

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Title: “The Streetlight Effect in Data-Driven Exploration”

We consider settings such as innovation-oriented R&D and entrepreneurship where agents must explore across different projects with varying but uncertain payoffs. How does providing partial data on project payoffs affect individual performance and social welfare? While data can typically reduce uncertainty and improve welfare, we present a simple theoretical framework where data provision can decrease group and individual payoffs. We predict that when data shines a light on sufficiently attractive (but not optimal) projects, it can crowd-out exploration activity, lowering individual and group payoffs as compared to when no data is provided. We test our theory in an online lab experiment and show that data provision on the true value of one project can hurt individual payoffs by 12% and reduce the group’s likelihood of discovering the optimal outcome by 48%. Our results provide a theoretical and empirical examination of the streetlight effect, outlining the conditions under which data leads agents to look under the lamppost rather than engage in socially beneficial exploration.

Presenter: Abhishek Nagaraj (University of California, Berkeley)

Coauthors: Johannes Hoelzemann (University of Vienna), Gustavo Manso (University of California, Berkeley) and Matteo Tranchero (University of California, Berkeley)

Discussant: Ryan Hill (Northwestern)

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Title: “The Anatomy of Financial Innovation”

The number of varieties of financial products that firms can use to raise funds from investors has rapidly expanded over the past decades. And yet, many firms issue only a few standard products, such as common stocks and bonds. This paper studies innovation in financial products using a combination of granular data on security issuance and a model of allocation of financial products to firms in specific sectors. We find three key patterns. First, the differential adoption of products across firms explains most of the observed variation in the amounts of funds raised. Second, firms that adopt new products are more successful in raising funds. Finally, most funds raised from new financial products come from a large number of distinct products that are highly specialized in that only a few firms use them. Our analysis indicates that innovation in financial markets is akin to innovation in consumer markets, which results not just in improvements in the quality of standardized products, but also in increasing varieties in a given market as products become more specialized.

Presenter: Ana Babus (Washington University in St. Louis)

Coauthors: Matias Marzani (Washington University in St. Louis) and Sara Moreira (Northwestern University & CEPR)

Discussant: Claire Celerier (University of Toronto)

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