An entrepreneur's choice of venture capitalist or angel-financing: a behavioral game-theoretic approach

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90 Citations (Scopus)

Abstract

We develop a game-theoretic model that analyzes the effects of economic and behavioral characteristics on an entrepreneur's choice of financier (venture capitalist or angel). After the entrepreneur has chosen his financier, the dyad faces double-sided moral hazard problems in the form of ex ante effort-shirking, and ex post project-expropriation. In making his choice of financier, the entrepreneur trades-off the following factors. The venture capitalist has higher value-creating abilities than the angel. However, the entrepreneur anticipates a closer, more empathetic and trusting relationship with the angel. Entrepreneur/angel empathy and trust mitigates the double-sided shirking and expropriation threats. Our model contributes to two strands of venture capitalist research; the entrepreneur's choice of financier in the face of double-sided moral hazard problems, and the effect of behavioral factors, such as empathy and trust, on the creation of 'relational rents'.
Original languageEnglish
Pages (from-to)359-374
JournalJournal of Business Venturing
Volume26
Issue number3
Early online date31 Oct 2009
DOIs
Publication statusPublished - May 2011

Keywords

  • angel financing
  • trust
  • value-adding abilities
  • double-sided moral hazard
  • venture capital
  • relational rents
  • empathy

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