All-In or checked-out? Disincentives and selection in income share agreements

Abstract

Liquidity constraints can distort efficient investment across a variety of domains, for both firms and individuals. While debt financing is often used to address liquidity constraints, especially at the individual level, there has been a recent push towards Income Share Agreements (ISAs) – equity contracts in which individuals can raise money today by selling shares of their future income. Studying the impact of ISAs on future performance has proven difficult, given the lack of developed markets with sufficient data. Identifying a new ISA marketplace for tournament poker players, we assemble a unique panel data set that tracks performance for individuals who sometimes receive ISA funding and sometimes do not. Beyond providing objective outcome measures, this setting allows for a straightforward comparison of the same individual’s performance with and without an ISA contract. Because players seek ISA funding more often for more expensive tournaments, we include flexible individual by tournament entry fee fixed effects to effectively compare the same player to himself in a similar tournament. Consistent with a reduction in effort, we find that return on investment falls substantially when participating in an ISA. Additional tests reveal that about 20% of the performance decline can be explained by players selecting into ISAs for tournaments that, even conditional on entry fee, consist of more skilled opponents. The remaining performance decline we attribute to the diminished individual incentives inherent in ISAs.