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A two-sided matching model of monitored finance

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  • DAM, Kaniska

Abstract

We analyse a model of two-sided matching and incentive contracts where expert investors (venture capitalists) with different monitoring capacities are matched with firms with different levels of initial wealth. Firms do not have sufficient start-up capital to cover their project costs and hence, seek external financing. In equilibrium, the matching and the payoffs of the venture capitalists and the firms are determined simultaneously. More effective VCs and higher-wealth firms consume higher payoffs. We also show that, in equilibrium VCs with higher monitoring ability invest in firms with lower initial wealth following a negatively assortative matching pattern.

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File URL: http://www.uclouvain.be/cps/ucl/doc/core/documents/coredp2007_5.pdf
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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2007005.

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Date of creation: 01 Jan 2007
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Handle: RePEc:cor:louvco:2007005

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Related research

Keywords: venture capital; assortative matching; incentive contracts;

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Cited by:
  1. Li, Fei & Ueda, Masako, 2009. "Why do reputable agents work for safer firms?," Finance Research Letters, Elsevier, vol. 6(1), pages 2-12, March.
  2. Hong, Suting, 2013. "Competition, syndication, and entry in the venture capital market," Working Papers 13-49, Federal Reserve Bank of Philadelphia.

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