Resource title

Financing of Competing Projects with Venture Capital

Resource image

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Resource description

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.

Resource author

Ekaterina Goldfain, Eugen Kovac

Resource publisher

Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/22943

Resource license

Adapt according to the presented license agreement and reference the original author.