טכניון מכון טכנולוגי לישראל
הטכניון מכון טכנולוגי לישראל - בית הספר ללימודי מוסמכים  
M.Sc Thesis
M.Sc StudentLev Noppe
SubjectFinancing Risky R&D Projects under Asymmetric
Information
DepartmentDepartment of Industrial Engineering and Management
Supervisor Professor Peled Dan
Full Thesis textFull thesis text - English Version


Abstract

We develop a model of competitive venture capital market for R&D projects financing and analyze the conflicts of interest and contracting process in the presence of informational asymmetry. We consider the effects of different types of informational asymmetries on equilibrium in these markets. The informational asymmetries can be single and two-sided, and can include the project’s innate quality, as well as the effort exerted by the inventor and venture capitalist. Assuming away monitoring of inventors during the R&D process, we study the equilibrium screening and funding of projects when the only instruments available are ex-ante self-selection by inventors among funding contracts, which specify investment levels in the project and ex-post distribution of project’s random returns between the inventor and the financier. We find that investment levels can be optimal even when the project types are unobservable to the venture capitalist. The informational asymmetry about both the quality of project and entrepreneur actions reduces the utility of entrepreneurs with better projects but increases their efforts and consequently the chances of project success. The informational asymmetry about venture capitalist’s actions leads to the further decrease of entrepreneurial utility and to an equilibrium level of effort by the venture capitalist which is lower than the level that both parties prefer.