Fundamental innovation usually involves huge upfront costs, but the benefits are spread across various sectors of the economy. Given the large costs and limited appropriability of the benefits associated with fundamental innovations, individual firms underinvest in these innovations relative to...

We analyze the roles of entrepreneurs, venture capitalists (VC), and the government in financing fundamental innovations, defined as those with positive social value net of development costs, but negative net present values to innovating firms. We first analyze the case where the entrepreneur,...