Title: Fairness norms and self-interest in venture capital/entrepreneur contracting and performance

Authors: Richard Fairchild

Addresses: School of Management, University of Bath, Claverton Down, Bath BA2 7AY, UK

Abstract: We consider the combined impact of agency problems and social fairness norms on venture capital/entrepreneur contracting and performance. Particularly, we develop a behavioural game-theoretic model in which a venture capitalist and an entrepreneur negotiate over their respective equity shares, and then exert value-adding efforts in running the business. Double-sided moral hazard exists in that both parties may exert sub-optimal effort (the |shirking| problem). We demonstrate that, for a given level of VC-ability, an increase in social fairness norms induces the VC to offer more equity to the entrepreneur, which in turn induces the entrepreneur to exert more effort. This improves venture performance.

Keywords: venture capital; double-sided moral hazard; fairness norms; self-interest; entrepreneur contracting; business performance; entrepreneurship; agency problems; social fairness; behavioural game theory; equity shares; value-added; venture performance.

DOI: 10.1504/IJBAF.2011.038754

International Journal of Behavioural Accounting and Finance, 2011 Vol.2 No.1, pp.4 - 20

Published online: 01 Mar 2011 *

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