Investment origination and screening: Separation or integration?

Financial intermediaries differ in how they organize project origination and screening: banks often separate these tasks across divisions, while venture capital firms typically integrate them. This paper develops a simple moral-hazard model in which origination effort is unobservable but screening is contractible and perfectly reveals project quality. The key determinant of organizational form is the principal's rational default investment decision absent screening---approve or decline---which, in the model, is pinned down by the expected net payoff of investing without screening. When default approval is optimal, integrating origination and screening creates an incentive conflict: screening reduces the probability that the agent receives the approval-contingent reward needed to motivate origination, making separation optimal. When default decline is optimal, this conflict disappears and integration can dominate. The model thus delivers a simple rationale for why banks tend to separate origination and screening, while venture capital organizations tend to integrate them.