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An entrepreneur's choice of venture capitalist or angel-financing: A behavioral game-theoretic approach

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  • Fairchild, Richard

Abstract

We develop a game-theoretic model that analyzes the effects of economic and behavioral characteristics on an entrepreneur's choice of financier (venture capitalist or angel). After the entrepreneur has chosen his financier, the dyad faces double-sided moral hazard problems in the form of ex ante effort-shirking, and ex post project-expropriation. In making his choice of financier, the entrepreneur trades-off the following factors. The venture capitalist has higher value-creating abilities than the angel. However, the entrepreneur anticipates a closer, more empathetic and trusting relationship with the angel. Entrepreneur/angel empathy and trust mitigates the double-sided shirking and expropriation threats. Our model contributes to two strands of venture capitalist research; the entrepreneur's choice of financier in the face of double-sided moral hazard problems, and the effect of behavioral factors, such as empathy and trust, on the creation of 'relational rents'.

Suggested Citation

  • Fairchild, Richard, 2011. "An entrepreneur's choice of venture capitalist or angel-financing: A behavioral game-theoretic approach," Journal of Business Venturing, Elsevier, vol. 26(3), pages 359-374, May.
  • Handle: RePEc:eee:jbvent:v:26:y:2011:i:3:p:359-374
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    References listed on IDEAS

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    Cited by:

    1. Urbig, Diemo & Weitzel, Utz & Rosenkranz, Stephanie & Witteloostuijn, Arjen van, 2012. "Exploiting opportunities at all cost? Entrepreneurial intent and externalities," Journal of Economic Psychology, Elsevier, vol. 33(2), pages 379-393.
    2. Linda Bergset, 2015. "The Rationality and Irrationality of Financing Green Start-Ups," Administrative Sciences, MDPI, Open Access Journal, vol. 5(4), pages 1-26, November.
    3. Christian Cancino & Claudio Bonilla & Marcos Vergara, 2016. "The impact of government support programs for the development of businesses in Chile," Serie Working Papers 28, Universidad del Desarrollo, School of Business and Economics.
    4. Drover, Will & Wood, Matthew S. & Fassin, Yves, 2014. "Take the money or run? Investors' ethical reputation and entrepreneurs' willingness to partner," Journal of Business Venturing, Elsevier, vol. 29(6), pages 723-740.
    5. Arcot, Sridhar, 2014. "Participating convertible preferred stock in venture capital exits," Journal of Business Venturing, Elsevier, vol. 29(1), pages 72-87.
    6. Vergara, Marcos & Bonilla, Claudio A. & Sepulveda, Jean P., 2016. "The complementarity effect: Effort and sharing in the entrepreneur and venture capital contract," European Journal of Operational Research, Elsevier, vol. 254(3), pages 1017-1025.
    7. Peitz, Martin & Shin, Dongsoo, 2015. "Capital-labor distortions in project finance," Working Papers 15-01, University of Mannheim, Department of Economics.
    8. Schwienbacher, Armin, 2013. "The entrepreneur's investor choice: The impact on later-stage firm development," Journal of Business Venturing, Elsevier, vol. 28(4), pages 528-545.
    9. Kim Klyver & Noel J. Lindsay & Suleiman K. “Sul” Kassicieh & Gary Hancock, 2017. "Altruistic investment decision behavior in early-stage ventures," Small Business Economics, Springer, vol. 48(1), pages 135-152, January.
    10. Ding, Zhujun & Au, Kevin & Chiang, Flora, 2015. "Social trust and angel investors' decisions: A multilevel analysis across nations," Journal of Business Venturing, Elsevier, vol. 30(2), pages 307-321.

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