Abstract
This article aims to use a bargaining power model to reduce moral hazard—in the form of entrepreneurial effort shirking—and derive an optimum sharing ratio of a Profit and Loss Sharing (PLS) contract that involves a Venture Capitalist and an Entrepreneur. The model reveals the following interesting findings. First, under complete information—where the Venture Capitalist has a bargaining power - Venture Capitalist offers the entrepreneur a profit sharing ratio that is less than her capital contribution ratio. Second, in an incomplete information setting, the entrepreneur demands a profit sharing ratio higher than her capital contribution ratio when the sum of the marginal cost (from exercising a higher effort) and private benefits (from exercising a low effort) is greater than the marginal return (from exercising a high effort). In addition, the model is used to derive a span of negotiation about the profit sharing ratio. Finally, an agent based simulation (Netlogo) platform is considered to implement the model, which allows a faster numerical calculations of the profit share and helps decide on the validity of the funding contract.
Original language | English |
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Pages (from-to) | 1228-1241 |
Number of pages | 14 |
Journal | International Journal of Finance and Economics |
Volume | 28 |
Issue number | 2 |
Early online date | 24 Jan 2021 |
DOIs | |
Publication status | Published - 30 Apr 2023 |
Funding
“We would like to thank Sheffield Business School at Sheffield Hallam University, EMI School of Engineering, LERMA and IFE-lab, University of Bath and IDB for their support in delivering this work. Special thanks goes to Denzil Watson, Robert Wilson, Damion Taylor, Lucian Tipi, Robert Marshall, Firoz Bhayat, Mark Thompson, Steve Johnson and all the team at FABS at Sheffield Hallam University for all their support and extensive effort in helping to deliver our research work. “
Funders | Funder number |
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Sheffield Business School at Sheffield Hallam University | |
University of Bath | |
Islamic Development Bank |
Keywords
- agent-based simulation (Netlogo)
- finance
- moral hazards
- optimal profit-sharing
- profit and loss sharing contracts
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics