Trust in a Network of Investors and Startup Entrepreneurs

Michael Roos () and Anna Klabunde ()
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Michael Roos: Ruhr University Bochum
Anna Klabunde: Ruhr University Bochum

A chapter in Artificial Economics and Self Organization, 2014, pp 147-159 from Springer

Abstract: Abstract We propose a simulation model of a stylized angel investor market in which the business relations are conditioned on the trust of the angel into the startup entrepreneur. Initial trust depends on social proximity between the angel and the entrepreneur and is later on updated depending on the returns an investor receives from an entrepreneur. We show that investors benefit most in terms of returns from an intermediate sensitivity of trust to returns. From an investor’s perspective, too much trust keeps too many unproductive firms in the market, while too little trust leads to the termination of profitable relations because of minor productivity drops. The proportion of entrepreneurs who reach the objective of leaving the market with enough capital, however, is higher if investors lose trust quickly and stop funding early. In this sense there is a conflict of interest between investors and entrepreneurs.

Keywords: Average Return; Initial Trust; Business Relation; Social Proximity; Intermediate Sensitivity (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:spr:lnechp:978-3-319-00912-4_12

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DOI: 10.1007/978-3-319-00912-4_12

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