Hunting for superstars

Abstract The “superstar economy” is characterized by payoff functions that depend in a discontinuous way on the quality level of corresponding products and services. Firm A might generate much higher returns than firm B, although A’s product only marginally superior to B’s product. We look at an investor who considers invest into start-ups want become active one particular technological segment. Consequently very best few projects high returns. faced with sequence investment opportunities, observes objective relative rankings seen so far, must decide whether how currently observed opportunity. Returns are realized end horizon. derive value optimal rules for risk-neutral risk averse investors. Under weak assumptions, expected infinite horizon utility exceeds initial wealth. show “invest all or nothing”, depending project’s ranking time occurrence, strategy. For risk-averse rule non-linear path dependent. simulation study performed log-utility