Technological Determinants of Financial Constraints

Jan Starmans ()
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Jan Starmans: Department of Finance, Stockholm School of Economics, 111 60 Stockholm, Sweden

Management Science, 2023, vol. 69, issue 5, 3003-3024

Abstract: This paper studies the investor’s investment decision in a standard financial contracting model. The investor chooses among entrepreneurs with heterogeneous production technologies who generate different probability distributions of cash flow under effort. I provide a complete characterization of optimal contracts, agency rents, and the investor’s investment decision. Differences in entrepreneurs’ production technologies imply differences in optimal contracts and agency rents across equally productive entrepreneurs, which biases and potentially distorts the investor’s investment decision. The results provide a complete characterization of entrepreneurs’ financial constraints in the presence of heterogeneous production technologies and uncover a fundamental link between production technologies, financial contracts, and financial constraints.

Keywords: moral hazard; contractual constraints; financial constraints; innovation (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:69:y:2023:i:5:p:3003-3024

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