Publications [#50320] of Florin A Dorobantu

Working Papers

1. Entrepreneurial Competition and Venture Capital Financing (March, 2006)
   (last updated on 2006/11/14)

   Abstract:
   In this paper I undertake a theoretical analysis of the effect of competition between entrepreneurs on the type of financing that they can obtain, focusing on the distinction between relationship financing, such as venture capital, and arm's length financing, such as that provided by angel investors. In a model with incomplete contracts and moral hazard generated by the ability of the entrepreneur to divert the investor's money toward private ends (such as research unrelated to the commercial success of the project), I show that (1) competition can enlarge the range of projects that receive funding in equilibrium, by reducing the future payoffs of the entrepreneur (obtainable if investment is postponed in the current period for the benefits of diversion), and (2) this efficiency enhancing effect of competition is more likely to occur when financing is arm's length, suggesting that venture capital funding should be more frequent in environments characterized by little entrepreneurial competition.