Financing of Competing Projects with Venture Capital

Arbeitspapier

We analyze innovation race in a moral hazard setting. We develop a model in which two competing entrepreneurs work independently on the same project. The entrepreneurs do not possess any wealth of their own and their research is financed by a venture capitalist. The project, if successful, generates a prize, which is to be shared between the winning entrepreneur and the venture capitalist. The venture capitalist cannot observe the allocation of funds he provides, which creates a moral hazard problem. We compare a competitive setting with a benchmark case where the venture capitalist finances only one entrepreneur. We show that the venture capitalist can increase the efficiency of research (hence, his own expected profit from investments) and alleviate the moral hazard problem if he finances both entrepreneurs. This conclusion is unambiguous, when the entrepreneurs are at the same (the last) stage of R&D. It holds for a reasonably large range of parameters, when the entrepreneurs are at different stages of R&D.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: Bonn Econ Discussion Papers ; No. 37/2005

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill ; Mergers; Acquisitions; Restructuring; Voting; Proxy Contests; Corporate Governance ; Innovation and Invention: Processes and Incentives
• Thema: venture capital ; moral hazard ; optimal contract ; innovation race ; Innovationswettbewerb ; Risikokapital ; Moral Hazard ; Theorie

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Goldfain, Ekaterina ; Kovac, Eugen
• Ereignis: Veröffentlichung
• (wer): University of Bonn, Bonn Graduate School of Economics (BGSE)
• (wo): Bonn
• (wann): 2005

Weitere Informationen

• Handle: http://hdl.handle.net/10419/22943
• Letzte Aktualisierung: 10.03.2025, 11:42 MEZ