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Investment under Uncertainty, Heterogeneous Beliefs, and Agency Conflicts


  • Yahel Giat
  • Steve T. Hackman
  • Ajay Subramanian


We develop a structural model to investigate the effects of asymmetric beliefs and agency conflicts on dynamic principal--agent relationships. Optimism has a first-order effect on incentives, investments, and output, which could reconcile the private equity puzzle. Asymmetric beliefs cause optimal contracts to have features consistent with observed venture capital and research and development (R&D) contracts. We derive testable implications for the effects of project characteristics on contractual features. We calibrate our model to data on pharmaceutical R&D projects and show that optimism indeed significantly influences project values. Permanent and transitory components of risk have opposing effects on project values and durations. The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email:, Oxford University Press.

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  • Yahel Giat & Steve T. Hackman & Ajay Subramanian, 2010. "Investment under Uncertainty, Heterogeneous Beliefs, and Agency Conflicts," Review of Financial Studies, Society for Financial Studies, vol. 23(4), pages 1360-1404, April.
  • Handle: RePEc:oup:rfinst:v:23:y:2010:i:4:p:1360-1404

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    References listed on IDEAS

    1. Lo, Andrew W. & Craig MacKinlay, A., 1990. "An econometric analysis of nonsynchronous trading," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 181-211.
    2. Michael Ewens & Matthew Rhodes-Kropf, 2015. "Is a VC Partnership Greater Than the Sum of Its Partners?," Journal of Finance, American Finance Association, vol. 70(3), pages 1081-1113, June.
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    Cited by:

    1. Giat, Yahel & Subramanian, Ajay, 2013. "Dynamic contracting under imperfect public information and asymmetric beliefs," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2833-2861.
    2. Michele Dell'Era & Luis Santos-Pinto, 2011. "Entrepreneurial Overconfidence, Self-Financing and Capital Market Efficiency," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 11.06, Université de Lausanne, Faculté des HEC, DEEP, revised Nov 2012.
    3. Campbell, T. Colin, 2014. "CEO optimism and the board's choice of successor," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 495-510.
    4. Jovanovic, Boyan & Prat, Julien, 2014. "Dynamic contracts when agent's quality is unknown," Theoretical Economics, Econometric Society, vol. 9(3), September.
    5. Thibaut Mastrolia & Dylan Possamai, 2015. "Moral hazard under ambiguity," Papers 1511.03616,, revised Oct 2016.
    6. Martin Szydlowski, 2012. "Ambiguity in Dynamic Contracts," Discussion Papers 1543, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    7. Chuluun, Tuugi & Graham, Carol, 2016. "Local happiness and firm behavior: Do firms in happy places invest more?," Journal of Economic Behavior & Organization, Elsevier, vol. 125(C), pages 41-56.
    8. Alonso, Ricardo & Câmara, Odilon, 2014. "Persuading skeptics and reaffirming believers," LSE Research Online Documents on Economics 58680, London School of Economics and Political Science, LSE Library.
    9. Alonso, Ricardo & Câmara, Odilon, 2016. "Bayesian persuasion with heterogeneous priors," Journal of Economic Theory, Elsevier, vol. 165(C), pages 672-706.

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