Abstract
We explore why venture capital funds limit the amount of capital they raise and do not reinvest the proceeds. This structure is puzzling because it leads to a succession of several funds financing each new venture which multiplies the well known agency problems. We argue that an inside investor cannot provide a hard budget constraint while a less well informed outsider can. Therefore, the venture capitalist delegates the continuation decision to the outsider by ex ante restricting the amount of capital he has under management. The soft budget constraint problem becomes the more important the higher the entrepreneur’s private benefits are and the higher the probability of failure of a project is.
Item Type: | Paper |
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Keywords: | Contract Theory, Corporate Finance, Venture Capital |
Faculties: | Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > A4 - Unvollständige Verträge, Marktinteraktion und soziale Vergleichsprozesse |
Subjects: | 300 Social sciences > 330 Economics |
JEL Classification: | G24, G31, D82 |
URN: | urn:nbn:de:bvb:19-epub-13378-8 |
Language: | English |
Item ID: | 13378 |
Date Deposited: | 10. Jul 2012, 13:09 |
Last Modified: | 04. Nov 2020, 12:53 |