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Renato Gomes, TSE Print
Tuesday, 12 March 2013, 14:00 - 15:15

Renato Gomes, Toulouse School of Economics

Cross-Subsidization and Matching Design

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Abstract: We study optimal contracting in a setting that combines experimentation and adverse selection.

In our leading example, an entrepreneur (agent) is better informed than the investor

(principal) about both the quality the project (risky arm’s distribution) and the entrepreneur’s

outside option (payoff  of the safe arm). The investor’s profit-maximizing mechanism can be

uniquely implemented with a menu of equity contracts  with different provisions on control rights.

In each of these contracts, the investor offers a fixed initial payment (seed money) in exchange

for a fixed share of the total revenue (equity), and a termination clause that specifies the critical

number of failures before the project is aborted. We obtain necessary and sufficient conditions

for the investor to extract all the rents from the entrepreneur’s expertise on project quality. Our

model has implications for the design of contracts to finance innovative activities.

Location: R42.2.113
Contact: Claude Adan, This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

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