A bargaining model for PLS entrepreneurial financing: A game theoretic model using agent-based simulation

Adil El Fakir, Richard Fairchild, Mohamed Tkiouat, Abderrahim Taamouti

Research output: Contribution to journalArticlepeer-review

2 Citations (SciVal)

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 languageEnglish
Pages (from-to)1228-1241
Number of pages14
JournalInternational Journal of Finance and Economics
Volume28
Issue number2
Early online date24 Jan 2021
DOIs
Publication statusPublished - 30 Apr 2023

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

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