Information Hold-up

Insider Investor and Information

Ehsan Azarmsa, Lin William Cong

We model dynamic financing of innovative projects where relational financiers observe entrepreneurs' experimentation and thus information they endogenously produce, before deciding on continued financing. We show that enterpreneurs' optimal information productions follow threshold strategies. Insider financiers extract little or no intermin rent even with full information monopoly, hindering efficient financing ex ante. Independent experimentation by insiders mitigate the problem, but can be either a complement or substitute to entrepreneurs' information production.