Working Paper: NBER ID: w11624
Authors: Zsuzsanna Fluck; Kedran Garrison; Stewart C. Myers
Abstract: This paper develops a model to study how entrepreneurs and venture-capital investors deal with moral hazard, effort provision, asymmetric information and hold-up problems. We explore several financing scenarios, including first-best, monopolistic, syndicated and fully competitive financing. We solve numerically for the entrepreneur's effort, the terms of financing, the venture capitalist's investment decision and NPV. We find significant value losses due to holdup problems and under-provision of effort that can outweigh the benefits of staged financing and investment. We show that a commitment to later-stage syndicate financing increases effort and NPV and preserves the option value of staged investment. This commitment benefits initial venture capital investors as well as the entrepreneur.
Keywords: Venture Capital; Contracting; Syndication; Moral Hazard; Asymmetric Information
JEL Codes: G24; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| holdup problems (D86) | entrepreneur's effort (L26) |
| entrepreneur's effort (L26) | net present value (NPV) (G00) |
| commitment to later-stage syndicate financing (G24) | entrepreneur's effort (L26) |
| commitment to later-stage syndicate financing (G24) | net present value (NPV) (G00) |
| holdup costs (D86) | advantages of staged financing (G32) |
| abandoning staged financing (G33) | project value (O22) |
| syndicate financing (G32) | entrepreneur's effort (L26) |
| syndicate financing (G32) | NPVs of entrepreneur and initial venture capitalist (L26) |