Financing and product market competition: Optimal contracts with venture capitalists

Cornelia Neff

No 162, Tübinger Diskussionsbeiträge from University of Tübingen, School of Business and Economics

Abstract: We consider the provision of venture capital in a dynamic agency model. In particular, we focus on the interaction between venture capital financing and product market competition: A young firm with a risky innovation project attempts to enter a market where it faces two periods of price competition with an incumbent firm. Since the young firm is wealth-constrained, it seeks equity financing from a venture capital company. The allocation of funds and learning about the project's quality are both subject to moral hazard. We analyze the provision of capital under (i) short-term and (ii) long-term contracting, and compare the results.

Keywords: Venture Capital; Dynamic Financial Contract; Moral Hazard and Learning; Innovation and Market Entry; Strategic Competition (search for similar items in EconPapers)
JEL-codes: G32 L13 O31 (search for similar items in EconPapers)
Date: 2000
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tuedps:162

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