Patent Signaling of Startups Can Be Less Effective under Coarse Information

Abstract

We consider a patent signaling model for startup financing where an entrepreneur signals his type by acquiring patents and investors have coarse information about the entrepreneur’s true success probability. By invoking an extension of Cho and Kreps’ (1987) Intuitive Criterion adapted to our model, we obtain the least-cost perfect Bayesian equilibrium, in which a high-type entrepreneur may get a lower equity share despite of acquiring a higher level of patent than in the benchmark where investors do not face coarse information. This implies that coarse information faced by investors may lead to less effective patent-signaling than in the benchmark.