IDEAS home Printed from https://ideas.repec.org/a/ids/ijbeaf/v4y2013i1p32-53.html
   My bibliography  Save this article

The effect of the legal system and empathy in venture capital contracting: theory and evidence

Author

Listed:
  • Richard Fairchild
  • Yiyuan Mai

Abstract

We examine the relationship between a society's legal system, a society's culture of empathy, the strength of venture capital contracts and venture performance. We develop a double-sided moral hazard model in which an entrepreneur and a venture capitalist exert value-adding efforts in a venture. The venture capitalist can select a strong contract, containing a punishment threat for entrepreneurial poor performance, or a weak contract which contains no such threat. However, the ability to punish the entrepreneur depends on the effectiveness of the legal system. Furthermore, selection of the strong contract destroys trust and empathy between the parties, adversely affecting performance. A strong contract is optimal if the legal system is strong and empathy is low, while a weak contract is optimal if the legal system is weak and empathy is high. We discuss international policy implications, and present results from our survey of Chinese venture capitalists that supports our model.

Suggested Citation

  • Richard Fairchild & Yiyuan Mai, 2013. "The effect of the legal system and empathy in venture capital contracting: theory and evidence," International Journal of Behavioural Accounting and Finance, Inderscience Enterprises Ltd, vol. 4(1), pages 32-53.
    • Handle: RePEc:ids:ijbeaf:v:4:y:2013:i:1:p:32-53
    as

    Download full text from publisher

    File URL: http://www.inderscience.com/link.php?id=57361
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ids:ijbeaf:v:4:y:2013:i:1:p:32-53. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sarah Parker (email available below). General contact details of provider: http://www.inderscience.com/browse/index.php?journalID=237 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.