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Fairness norms and self-interest in venture capital/entrepreneur contracting and performance

Author

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  • Richard Fairchild

Abstract

We consider the combined impact of agency problems and social fairness norms on venture capital/entrepreneur contracting and performance. Particularly, we develop a behavioural game-theoretic model in which a venture capitalist and an entrepreneur negotiate over their respective equity shares, and then exert value-adding efforts in running the business. Double-sided moral hazard exists in that both parties may exert sub-optimal effort (the 'shirking' problem). We demonstrate that, for a given level of VC-ability, an increase in social fairness norms induces the VC to offer more equity to the entrepreneur, which in turn induces the entrepreneur to exert more effort. This improves venture performance.

Suggested Citation

  • Richard Fairchild, 2011. "Fairness norms and self-interest in venture capital/entrepreneur contracting and performance," International Journal of Behavioural Accounting and Finance, Inderscience Enterprises Ltd, vol. 2(1), pages 4-20.
    • Handle: RePEc:ids:ijbeaf:v:2:y:2011:i:1:p:4-20
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    Cited by:

    1. Hui Fu & Jun Yang & Yunbi An, 2019. "Contracts for venture capital financing with double-sided moral hazard," Small Business Economics, Springer, vol. 53(1), pages 129-144, June.

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