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Contractual Execution, Strategic Incompleteness and Venture Capital

  • Dessí, Roberta
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    Contractual execution generates hard information, available to the contracting parties, even when contracts are secretly executed. Building on this simple observation, the paper shows that incomplete contracts can be preferred to complete contracts. This is because (i) execution of incomplete contracts reveals less information to outside parties, giving rise to strategic gains; (ii) secretly executed complete contracts could not do better, given the possible strategic uses of the hard information generated by execution of the contract. The key effects at work are explored in the case of financial contracts for innovative start-up companies, providing a rationale for the observed differences in the extent to which venture capital contracts include a variety of contingencies, and for how this varies across industries and geographically.

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    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7413.

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    Date of creation: Aug 2009
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    Handle: RePEc:cpr:ceprdp:7413
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    1. Jennifer F. Reinganum & Andrew F. Daughety, 2004. "Secrecy and Safety," Econometric Society 2004 North American Summer Meetings 53, Econometric Society.
    2. Caillaud, Bernard & Jullien, B & Picard, P, 1995. "Competing Vertical Structures: Precommitment and Renegotiation," Econometrica, Econometric Society, vol. 63(3), pages 621-46, May.
    3. Cestone, G. & White, L., 1999. "Anti-Competitive Financial Contracting: the Design of Financial Claims," Papers 99.525, Toulouse - GREMAQ.
    4. Bharat N. Anand & Alexander Galetovic, 1996. "Information, Nonexcludability, and Financial Market Structure," Documentos de Trabajo 7, Centro de Economía Aplicada, Universidad de Chile.
    5. Anderlini, Luca & Felli, Leonardo, 1998. "Incomplete Contracts and Complexity Costs," MPRA Paper 28483, University Library of Munich, Germany.
    6. Sahlman, William A. & Stevenson, Howard H., 1985. "Capital market myopia," Journal of Business Venturing, Elsevier, vol. 1(1), pages 7-30.
    7. Anderlini, L. & Felli, L., 1993. "Incomplete Written Contracts: Undescribable States of Nature," Papers 183, Cambridge - Risk, Information & Quantity Signals.
    8. Yael V. Hochberg & Alexander Ljungqvist & Yang Lu, 2010. "Networking as a Barrier to Entry and the Competitive Supply of Venture Capital," Journal of Finance, American Finance Association, vol. 65(3), pages 829-859, 06.
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