Raising Capital from Heterogeneous Investors

Marina Halac, Ilan Kremer and Eyal Winter ()

No 245773051, Working Papers from Lancaster University Management School, Economics Department

Abstract: A rm raises capital from multiple investors to fund a project. The project succeeds only if the capital raised exceeds a stochastic threshold, and the rm offers payments contingent on success. We study the rm's optimal unique-implementation scheme, namely the scheme that guarantees the rm the maximum payoff. This scheme pays investors differential net returns (per unit of capital) depending on the size of their investments. We show that if the distribution of the investment threshold is log-concave, larger investors receive higher net returns than smaller investors. Moreover, higher dispersion in investor size increases the rm's payoff. Our analysis highlights strategic risk as an important potential driver of inequality.

Keywords: mechanism design; contracting with externalities; collective action problem; strategic complementarities; unique implementation (search for similar items in EconPapers)
JEL-codes: D86 G24 L24 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-cfn, nep-cta and nep-ppm
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Related works:
Journal Article: Raising Capital from Heterogeneous Investors (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:lan:wpaper:245773051

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