Fairness Norms and Self-interest in VC/E Contracting: A Behavioral Game-theoretic Approach - PowerPoint PPT Presentation

About This Presentation
Title:

Fairness Norms and Self-interest in VC/E Contracting: A Behavioral Game-theoretic Approach

Description:

Fairness Norms and Self-interest in VC/E Contracting: A Behavioral Game-theoretic Approach Existing VC/E Financial Contracting Models assume narrow self-interest. – PowerPoint PPT presentation

Number of Views:54
Avg rating:3.0/5.0
Slides: 19
Provided by: mns4
Category:

less

Transcript and Presenter's Notes

Title: Fairness Norms and Self-interest in VC/E Contracting: A Behavioral Game-theoretic Approach


1
Fairness Norms and Self-interest in VC/E
Contracting A Behavioral Game-theoretic Approach
  • Existing VC/E Financial Contracting Models assume
    narrow self-interest.
  • Double-sided Agency problems (both E and VC exert
    Value-adding Effort) (Casamatta JF 2003, Repullo
    and Suarez 2004, Fairchild JFR 2004).
  • Procedural Justice Theory Fairness and Trust
    important.
  • No existing behavioral Game theoretic models of
    VC/E contracting.

2
My Model
  • VC/E Financial Contracting, combining
    double-sided Moral Hazard (VC and E shirking
    incentives) and fairness norms.
  • 2 stages VC and E negotiate financial contract.
  • Then both exert value-adding efforts.

3
How to model fairness? Fairness Norms.
  • Fair VCs and Es in society.
  • self-interested VCs and Es in society.
  • Matching process one E emerges with a business
    plan. Approaches one VC at random for finance.
  • Players cannot observe each others type.

4
Timeline
  • Date 0 VC makes ultimatum offer of equity stake
    to E
  • Date 1 VC and E exert value-adding effort in
    running the business
  • Date 2 Success Probability
  • gt income R.
  • Failure probability
  • gtincome zero

5
  • Expected Value of Project
  • Represents VCs relative ability (to E).

6
Fairness Norms
  • Fair VC makes fair (payoff equalising) equity
    offer
  • Self-interested VC makes self-interested
    ultimatum offer
  • E observes equity offer. Fair E compares equity
    offer to social norm. Self-interested E does not,
    then exerts effort.

7
Expected Payoffs

If VC is fair, by definition,
8
Solve by backward induction
  • If VC is fair
  • Since
  • for both E
    types.
  • gt
  • gt

9
VC is fair continued.
  • Given

Optimal Effort Levels
Fair VCs equity proposal (equity norm)
10
VC is self-interested
  • From Equation (1), fair Es optimal effort

11
Self-interested VCs optimal Equity proposal
  • Substitute players optimal efforts into V PR,
    and then into (1) and (2). Then, optimal equity
    proposal maximises VCs indirect payoff gt

12
Examples
  • VC has no value-adding ability (dumb money) gt
  • gt
  • r 0 gt
  • r gt 1 ,

13
Example 2
  • VC has equal ability to E
  • gt
  • r 0 gt
  • r gt 1 ,
  • We show that
  • as r gt 1

14
Table 1.
15
Graph
16
Table of venture performance
17
Graph of Venture Performance.
18
Future Research.
  • Dynamic Fairness Gameex post opportunism (Utset
    2002).
  • Complementary Efforts.
  • Trust Games.
  • Experiments.
  • Control Rights.
Write a Comment
User Comments (0)
About PowerShow.com