Abstract
For venture capitals, it is a long process from an entry to its exit. In this paper, the activity of venture investment will be divided into multistages. And, according to the effort level entrepreneurs will choose, the venture capitalists will provide an equity structure at the very beginning. As a benchmark for comparison, we will establish two game models on multistage investment under perfect rationality: a cooperative game model and a noncooperative one. Further, as a cause of pervasive psychological preference behavior, reciprocity motivation will influence the behavior of the decision-makers. Given this situation, Rabin’s reciprocity motivation theory will be applied to the multistage game model of the venture investment, and multistage behavior game model will be established as well, based on the reciprocity motivation. By looking into the theoretical derivations and simulation studies, we find that if venture capitalists and entrepreneurs both have reciprocity preferences, their utility would have been Pareto improvement compared with those under perfect rationality.
Highlights
Venture capitals have been playing a crucial role in new unlisted SMEs for a long time, especially in new high-tech enterprises
In America, venture capital institutions invest 70% of their capitals into high-tech industries dominated by IT
In China, 29.27% of venture capital institutions focus on high-growth fields, and 16.75% of them focus on high-tech areas
Summary
Venture capitals have been playing a crucial role in new unlisted SMEs for a long time, especially in new high-tech enterprises. Employees’ paying more effort will naturally improve the output and, both the CEO and employees will benefit from it This reciprocal behavior, in behavioral economics, is called the theory of reciprocal fairness preference. There are many other examples in which reciprocity theory has been applied to improve the performance of enterprises examples; such cases are outstanding in South Korea, Japan, and China. There exists such a situation in a venture capital: venture capitalist (later denoted as VC) paid the fixed income to EN, and EN will increase efforts to repay VC; the mutual reciprocal of both VC and EN improves the utility of both sides. In this paper we will study the venture investment’s decision-making from two perspectives: multistages and the reciprocal fairness preference as well
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