A multi-period game model between venture capitalists and entrepreneurs for optimal incentive program

Abstract

Based on principal-agent theory, the separation of Legal Ownership and control for Value-driven factors in venture capitalists -backed enterprises is so seriously that the venture capitalist faces the moral hazard, adversity selection of the entrepreneurs, and the monitoring cost is high for him. Thus it's necessary to design incentive patterns for entrepreneurs to improve their performance. This study examines the relationship between a venture capitalist and an entrepreneur and follows it from its inception to the exit stage. The model we developed is a multi-period game theoretic model with moral hazard where the contract is set in the first period. Because there is information asymmetry and the inconsistency of the goal between the principal and agent in the process of venture investment, when the incentive mechanism designed by the venture capitalists is not sufficient to fully stimulate the entrepreneurs, the rational entrepreneurs will pursuit the objectives that are not met the interests of the venture capitalists, which is called moral hazard and adverse selection. The contribution of the study lies in that it provides on optimal incentive program and its characterization of an endogenous exit point. The study states that the incentive patterns can be applied to the whole enterprise, and analyzes the related problem of actual application and brings up the counter plans.