Hide and seek search: Why angels hide and entrepreneurs seek

Merwan Engineer (), Paul Schure () and Dan H. Vo

Journal of Economic Behavior & Organization, 2019, vol. 157, issue C, 523-540

Abstract: The angel capital market poses a puzzle for search theory. Angel investors (“angels”) are often described in the literature as if they were hiding from entrepreneurs that seek angel capital investment. Such behavior by angels forces entrepreneurs to engage in costly search for angels. In our model, a separating equilibrium exists in which hiding by angels discourages search by low-productivity entrepreneurs who would inundate any visible angels. Only high-productivity entrepreneurs incur the time and effort costs of search to signal their type and avoid the lemons problem in the visible capital market. As the search market generates higher quality, hence more profitable matches, social surplus may increase despite the costs of hiding and searching. Hide and seek search contrasts with standard search theory where agents choose strategies to mitigate inherent physical and informational search frictions.

Keywords: Adverse selection; Angel capital market; Entrepreneurial finance; Search theory; Signaling; Venture capitalists (search for similar items in EconPapers)
JEL-codes: D02 D83 G10 G24 G29 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:157:y:2019:i:c:p:523-540

DOI: 10.1016/j.jebo.2018.10.007

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