This paper investigates the interplay between government subsidies, production technology, and learning through imprecise signals in shaping a firm’s investment strategy. Utilizing a real options framework with complementary investments, we address uncertainty in different investment stages and the limited informativeness of signals. Our findings reveal that optimal subsidization aligns a firm’s incentives with the evolving knowledge gained during the investment process. Specifically, the interaction between production technology elasticity and signal quality is crucial. Subsidies prove most effective when signals are highly informative, particularly when the technology’s returns are dependent on later-stage investments. This analysis highlights the need to manage uncertainty at each stage to maximize social net benefits, offering insights for policymakers on structuring subsidies under uncertainty.

We analyze venture capital budgeting in a model with agency conflicts among entrepreneurs, venture capitalists, and investors. Our three-player setting is crucial for the analysis of compensation to venture capitalists. We focus on the venture capitalist's decision to invest in correlated enterprises, and we emphasize the importance of information and the venture capitalist's role in resolving adverse selection on the entrepreneurial side. The importance of information increases the minimum carried interest offered to the venture capitalist, whereas correlated projects decrease it. The carried interest is determined by the size and level of correlation in his portfolio. Our analysis provides predictions in line with a number of empirical observations, e.g. that venture capitalists typically receive a carried interest which is “sticky” around a 20% level.