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

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
JournalInternational Journal of Finance and Economics
Early online date24 Jan 2021
DOIs
Publication statusE-pub ahead of print - 24 Jan 2021

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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