A Soft Budget Constraint Explanation for the Venture Capital Cycle
AbstractWe explore why venture capital funds limit the amount of capital they raise and do not reinvest the proceeds. This structure is puzzling because it leads to a succession of several funds financing each new venture, which multiplies the well-known agency problems. We argue that an inside investor cannot provide a hard budget constraint while a less informed outsider can. Therefore, the venture capitalist delegates the continuation decision to the outsider by ex ante restricting the amount of capital he has under management. The soft budget constraint problem becomes the more important the higher the entrepreneur's private benefits are and the higher the probability of failure of a project is. Copyright 2008 The Author. Journal Compilation Verein für Socialpolitik and Blackwell Publishing Ltd. 2008.
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Bibliographic InfoArticle provided by Verein für Socialpolitik in its journal German Economic Review.
Volume (Year): 10 (2009)
Issue (Month): (02)
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=1465-6485
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- Dirk Bergemann & Ulrigh Hege, 2005.
"The Financing of Innovation: Learning and Stopping,"
RAND Journal of Economics,
The RAND Corporation, vol. 36(4), pages 719-752, Winter.
- Bergemann, Dirk & Hege, Ulrich, 2001. "The Financing of Innovation: Learning and Stopping," CEPR Discussion Papers 2763, C.E.P.R. Discussion Papers.
- Bergemann, D. & Hege, U., 2001. "The Financing of Innovation: Learning and Stopping," Discussion Paper 2001-16, Tilburg University, Center for Economic Research.
- Dirk Bergemann & Ulrich Hege, 2001. "The Financing of Innovation: Learning and Stopping," Cowles Foundation Discussion Papers 1292, Cowles Foundation for Research in Economics, Yale University.
- Dirk Bergemann & Ulrich Hege, 2001. "The Financing of Innovation: Learning and Stopping," Cowles Foundation Discussion Papers 1292R, Cowles Foundation for Research in Economics, Yale University, revised Oct 2004.
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