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A Two-Sided Matching Model of Monitored Finance

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  • Kaniska Dam

    (Division of Economics, CIDE)

Abstract

We analyse a model of two-sided matching and incentive contracts where expert investors (venture capitalists) with different monitoring capacities are matched with firms with different levels of initial wealth. Firms do not have sufficient start-up capital to cover their project costs and hence, seek external financing. In equilibrium, the matching and the payoffs of the venture capitalists and the firms are determined simultaneously. More effective VCs and higher-wealth firms consume higher payoffs. We also show that, in equilibrium VCs with higher monitoring ability invest in firms with lower initial wealth following a negatively assortative matching pattern.

Suggested Citation

  • Kaniska Dam, 2007. "A Two-Sided Matching Model of Monitored Finance," Working papers DTE 383, CIDE, División de Economía.
    • Handle: RePEc:emc:wpaper:dte383
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    File URL: http://www.economiamexicana.cide.edu/RePEc/emc/pdf/DTE/DTE383.pdf
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    References listed on IDEAS

    as
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    6. Alkan, Ahmet & Gale, David, 1990. "The core of the matching game," Games and Economic Behavior, Elsevier, vol. 2(3), pages 203-212, September.
    7. Becker, Gary S, 1973. "A Theory of Marriage: Part I," Journal of Political Economy, University of Chicago Press, vol. 81(4), pages 813-846, July-Aug..
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    Citations

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    Cited by:

    1. Rafael Silveira & Randall Wright, 2016. "Venture Capital: A Model of Search and Bargaining," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 19, pages 232-246, January.
    2. Li, Fei & Ueda, Masako, 2009. "Why do reputable agents work for safer firms?," Finance Research Letters, Elsevier, vol. 6(1), pages 2-12, March.
    3. Suting Hong, 2013. "Competition, syndication, and entry in the venture capital market," Working Papers 13-49, Federal Reserve Bank of Philadelphia.

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    More about this item

    Keywords

    A Two-Sided Matching Model; Monitored Finance;

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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