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Venture Capital Contracting with Renegotiation

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  • Arieh Gavious

    ()
    (Ben Gurion University)

  • Ramy Elitzur

    ()
    (University of Toronto)

Abstract

This paper examines contracting between a venture capitalist and an entrepreneur in a setting with unobservable effort when contracts are renegotiated each period. The contribution of our paper lies in the insights it provides on optimal contracts in this setting. The insights from our model prove to be significantly different in certain respects than those obtained under a multi-period contract without renegotiation or a single period setting. An example is worked out to illustrate the division of payoff between the venture capitalist and the entrepreneur each period.

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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 29 (2009)
Issue (Month): 1 ()
Pages: 67-78

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Handle: RePEc:ebl:ecbull:eb-08l00021

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  1. Wang, Susheng & Zhou, Hailan, 2004. "Staged financing in venture capital: moral hazard and risks," Journal of Corporate Finance, Elsevier, Elsevier, vol. 10(1), pages 131-155, January.
  2. Bergemann, Dirk & Hege, Ulrich, 1997. "Venture Capital Financing, Moral Hazard and Learning," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1738, C.E.P.R. Discussion Papers.
  3. Steven N. Kaplan & Per Stromberg, 2003. "Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 70(2), pages 281-315, 04.
  4. Joshua Lerner, 1994. "The Syndication of Venture Capital Investments," Financial Management, Financial Management Association, Financial Management Association, vol. 23(3), Fall.
  5. Admati, Anat R & Pfleiderer, Paul, 1994. " Robust Financial Contracting and the Role of Venture Capitalists," Journal of Finance, American Finance Association, American Finance Association, vol. 49(2), pages 371-402, June.
  6. Yuk-Shee Chan., 1982. "On the Positive Role of Financial Intermediation in Allocation of Venture Capital in a Market with Imperfect Information," Research Program in Finance Working Papers, University of California at Berkeley 127, University of California at Berkeley.
  7. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, Elsevier, vol. 27(2), pages 473-521, October.
  8. Elitzur, Ramy & Gavious, Arieh, 2003. "A multi-period game theoretic model of venture capitalists and entrepreneurs," European Journal of Operational Research, Elsevier, Elsevier, vol. 144(2), pages 440-453, January.
  9. Trester, Jeffrey J., 1998. "Venture capital contracting under asymmetric information," Journal of Banking & Finance, Elsevier, Elsevier, vol. 22(6-8), pages 675-699, August.
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