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Technological Determinants of Financial Constraints

Author

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  • Jan Starmans

    (Department of Finance, Stockholm School of Economics, 111 60 Stockholm, Sweden)

Abstract

This paper studies the investor’s investment decision in a standard financial contracting model. The investor chooses among entrepreneurs with heterogeneous production technologies who generate different probability distributions of cash flow under effort. I provide a complete characterization of optimal contracts, agency rents, and the investor’s investment decision. Differences in entrepreneurs’ production technologies imply differences in optimal contracts and agency rents across equally productive entrepreneurs, which biases and potentially distorts the investor’s investment decision. The results provide a complete characterization of entrepreneurs’ financial constraints in the presence of heterogeneous production technologies and uncover a fundamental link between production technologies, financial contracts, and financial constraints.

Suggested Citation

  • Jan Starmans, 2023. "Technological Determinants of Financial Constraints," Management Science, INFORMS, vol. 69(5), pages 3003-3024, May.
    • Handle: RePEc:inm:ormnsc:v:69:y:2023:i:5:p:3003-3024
    DOI: 10.1287/mnsc.2022.4421
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