The complementarity effect in the venture capital contract: a generalised formulation and new insights
by Menghui Qiu
International Journal of Inventory Research (IJIR), Vol. 6, No. 1, 2021

Abstract: The moral hazard problem plagues the start-ups and even mature enterprises when they incorporate venture capital to pursue business upgrade or expansion. Especially in the value chain where the venture capitalist can synergise with the entrepreneur to contribute to the firm value. This paper proposes a game theoretic approach to solve the entrepreneur's optimisation problem in a venture capital financing scheme and generalises the formulation without a specific revenue function. Furthermore, this study generates managerial insights for venture capital market and relevant sustainable supply chain management. The key results also show that the complementarity effect can incentivise both the entrepreneur and the venture capitalist to exert more effort, thus achieving larger enterprise value when it is relatively significant, and the inefficiency caused by the allocation of equity share could be mitigated.

Online publication date: Wed, 31-Mar-2021

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