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Financing and product market competition: Optimal contracts with venture capitalists

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  • Neff, Cornelia

Abstract

We consider the provision of venture capital in a dynamic agency model. In particular, we focus on the interaction between venture capital financing and product market competition: A young firm with a risky innovation project attempts to enter a market where it faces two periods of price competition with an incumbent firm. Since the young firm is wealth-constrained, it seeks equity financing from a venture capital company. The allocation of funds and learning about the project's quality are both subject to moral hazard. We analyze the provision of capital under (i) short-term and (ii) long-term contracting, and compare the results.

Suggested Citation

  • Neff, Cornelia, 2000. "Financing and product market competition: Optimal contracts with venture capitalists," Tübinger Diskussionsbeiträge 162, University of Tübingen, School of Business and Economics.
    • Handle: RePEc:zbw:tuedps:162
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    More about this item

    Keywords

    Venture Capital; Dynamic Financial Contract; Moral Hazard and Learning; Innovation and Market Entry; Strategic Competition;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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