Contracts for venture capital financing with double-sided moral hazard

Hui Fu (), Jun Yang () and Yunbi An ()
Additional contact information
Hui Fu: Jiangnan University
Jun Yang: Acadia University
Yunbi An: University of Windsor

Small Business Economics, 2019, vol. 53, issue 1, No 6, 129-144

Abstract: Abstract Using a Nash bargaining approach, we analyze the financing contract between the entrepreneur and the venture capitalist with double-sided moral hazard in a start-up enterprise. Our results show that there exists an optimal contract set between the entrepreneur and the venture capitalist, in which all contracts achieve an identical second-best social state. Within the optimal contract set, there exists continuum of joint debt-equity financing. The pure equity financing contract exists in the optimal contract set when the ratio of total social surplus to the amount of investment is greater than a threshold.

Keywords: Optimal contract; Venture capital; Double-sided moral hazard; Bargaining game (search for similar items in EconPapers)
JEL-codes: C70 D82 G24 L26 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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DOI: 10.1007/s11187-018-0028-2

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