Working Paper: CEPR ID: DP3418
Authors: Wouter Dessein
Abstract: The allocation of control rights in a venture does not matter if partners have congruent preferences. This Paper develops a theory of control as a signal of congruence, and applies it to the structure of alliances between a privately informed ?entrepreneur? (technology firm) and an ?investor? (large corporation). Investor control increases when the entrepreneur is better informed or when the information that the investor receives during the course of the venture is more noisy. More investor control, however, often results in less investor interference, since the investor puts more trust in the entrepreneur upon receiving more control and, hence, has a tendency to neglect ambiguous information ex post. As a result, the cost of signaling is endogenous and the quality of the post-contracting information constrains the amount of pre-contracting information that can be revealed. Our results are in line with empirical findings on control rights in biotechnology alliances and venture capital contracts.
Keywords: Asymmetric Information; Authority; Biotechnology; Alliances; Control Rights; Venture Capital
JEL Codes: D82; G24; G32; L20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Level of Asymmetric Information (D82) | Allocation of Control Rights (G34) |
| Allocation of Control Rights (G34) | Investor Interference (G34) |
| Informed Entrepreneur (L26) | Control Rights (P14) |
| Control Rights (P14) | Trust in Entrepreneur (L26) |