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Optimal Information Revelation by Informed Investors

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  • Strausz, Roland

Abstract

This paper studies the structure of optimal finance contracts in an agency model of outside finance, when investors possess private information. We show that, depending on the intensity of the entrepreneur’s moral hazard problem, optimal contracts induce full, partial, or no revelation of the investor’s private information. A partial or nonrevelation of information is optimal, when it mitigates an undersupply of effort by the entrepreneur due to moral hazard.

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Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 34.

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Date of creation: Jan 2005
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Handle: RePEc:trf:wpaper:34

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Keywords: informed investors; optimal finance contracts; partial information revelation;

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  1. Schmidt, Klaus M., 1999. "Convertible Securities and Venture Capital Finance," CEPR Discussion Papers 2317, C.E.P.R. Discussion Papers.
  2. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  3. Inderst, Roman & Mueller, Holger M, 2003. "Credit Risk Analysis and Security Design," CEPR Discussion Papers 3686, C.E.P.R. Discussion Papers.
  4. Kaplan, Steven N. & Strömberg, Per, 2003. "Characteristics, Contracts and Actions: Evidence from Venture Capitalist Analyses," SIFR Research Report Series 14, Institute for Financial Research.
  5. Admati, Anat R & Pfleiderer, Paul, 1994. " Robust Financial Contracting and the Role of Venture Capitalists," Journal of Finance, American Finance Association, vol. 49(2), pages 371-402, June.
  6. Bergemann, Dirk & Hege, Ulrich, 1998. "Venture capital financing, moral hazard, and learning," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 703-735, August.
  7. Bester, Helmut & Strausz, Roland, 2001. "Contracting with Imperfect Commitment and the Revelation Principle: The Single Agent Case," Econometrica, Econometric Society, vol. 69(4), pages 1077-98, July.
  8. Schmidt, Klaus M., 2003. "Convertible Securities and Venture Capital Finance," Munich Reprints in Economics 19769, University of Munich, Department of Economics.
  9. Manove, Michael & Padilla, A Jorge & Pagano, Marco, 2001. "Collateral versus Project Screening: A Model of Lazy Banks," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 726-44, Winter.
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