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The Division of Ownership in New Ventures

  • Oliver Fabel

    ()

    (Department of Economics, University of Konstanz)

  • Dominique Demougin

    ()

    (School of Business and Economics, Berlin)

The current study investigates a tripartite incentive contract between an innovator supplying an intellectual asset, a professional assigned to productive tasks, and a consulting firm specialized in recruiting qualified personnel. The liquidity-constrained professional is compensated by receiving a share of one half in the new venture. With continuous search activities of the consultant the pure tripartite partnership implements the consultant's expected profit maximum. The consultant's and the innovator's shares reflect the relative value of search. However, the consultant's optimal search effort is inefficiently low. With binary search and only two innovator types , there may also exist bipartite partnerships of equals between the innovator and the professional, and bipartite partnerships of equals between the consultant and the professional. The latter emerge from complete buy-outs of innovators with low value business ideas.

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Paper provided by Research Group Heterogeneous Labor, University of Konstanz/ZEW Mannheim in its series Working Papers of the Research Group Heterogenous Labor with number 04-03.

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Length: 37 pages
Date of creation: 25 Feb 2004
Date of revision:
Handle: RePEc:knz:hetero:0403
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