Abstract
We consider a model of external financing in which entrepreneurs are privately informed about the quality of their projects and seek funds from competitive fi- nanciers. The literature restricts attention to monotonic or ‘manipulation proof’ securities and finds that straight debt is the unique optimal contract. We character- ize the optimal contract when entrepreneurs can misreport their earnings by some amount. Straight debt is often suboptimal and never uniquely optimal. The opti- mal contract is non-monotonic and involves profit manipulation in equilibrium. It can be implemented either including performance-based bonuses, or via milestone payments, (as in venture capital).
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
