Model for Design of Portfolio Venture Investment Contract When Taking Moral Hazards into Account

L Yin,Y Liu,Z Wang

doi:10.1155/2020/8821371

Abstract

Portfolio investment is adopted by the venture capital to diversify those risks involved in project selection, investing or operating so that the venture capitalist can expect a relatively stable income and lower financing risks. Based on the design of portfolio investment contract with unlimited funds developed by Kanniainen and Keuschnigg, and Inderst et al., this article makes a modification and presents a model given the limitation of funds available for the venture capitalist. It is demonstrated that the marginal benefit of efforts paid by the entrepreneurs exceeds the marginal cost, given the limitation of funds available, which will conduce to a high-level engagement of the entrepreneurs. Thus, by adopting the design of renegotiation contract, the venture capitalist can manage to stimulate the entrepreneurs to make efforts, which is to result in moral hazard reduction.

Highlights

Enhanced risks in the venture capital investments may vary due to influences of the internal and external environment.e high uncertainty makes it essential for the venture capital to adopt an appropriate portfolio investment
It is supposed that the decision about a second investment is constrained by limited fund availability to the venture capitalist
The entrepreneurs involved in the portfolio contract have to compete with each other to obtain the second investment

Summary

Introduction

Enhanced risks in the venture capital investments may vary due to influences of the internal and external environment. In addition to making up for the losses resulted from the failed projects accounting for up to 70% of the number of assets included in a portfolio, the yields generated by the other 30% succeeded can bring the venture capitalist a return high enough. Either from a theoretic perspective or a practical one, the portfolio investment decision is more likely to be constrained by limited fund availability to the venture capitalist Taking this fund availability constraint into account, our article develops a model for the design of the portfolio venture investment contract, by which means an insight can be got into the underlying mechanism and how it works on bilateral moral hazard reduction

Literature Review

Model Introduction

Findings

Conclusions