Contracts for venture capital financing with double-sided moral hazard
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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.
KeywordsOptimal contract Venture capital Double-sided moral hazard Bargaining game
JEL classificationC70 D82 G24 L26
Hui Fu thanks his supervisor, Professor Tian Cunzhi, for his guidance, support, and continuing encouragement throughout his Ph.D. studies at Jinan University.
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