Is ambiguity aversion bad for innovation?

Beauchêne, Dorian

doi:10.1016/j.jet.2019.07.015

Cited by 6 publications

(1 citation statement)

References 39 publications

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“…Liu et al [10] investigated a principal-agent model in which the information on future firm performance is ambiguous, and the agent is both, ambiguity averse and risk-averse. Assuming the product market outcome is ambiguous, Beauchêne [11] found that ambiguity averse companies tend to invest in more projects, while risk-averse companies invest in fewer projects.…”

Section: Introductionmentioning

confidence: 99%

Venture Capital Contracting with Ambiguity Sharing and Effort Complementarity Effect

Chang

Yang

2020

Mathematics

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In this paper, we established a continuous-time agency model in which an ambiguity-averse venture capitalist (VC) employs an ambiguity-neutral entrepreneur (EN) to manage an innovative project. We analyzed the connection between ambiguity sharing and incentives under double moral hazard. Applying a stochastic dynamic programming approach, we solved the VC’s maximization problem and obtained the Hamilton–Jacobi–Bellman (HJB) equation under a special form of the value function. We showed that the optimal pay-performance sensitivity was a fixed point of a nonlinear equation. The model ambiguity on the probability measure induced a tradeoff between ambiguity sharing and the incentive compensation that improved the EN’s pay-performance sensitivity level. Besides, we simulated the model and showed that when two efforts were complementary, the VC’s effort did not monotonically decrease with respect to the pay-performance sensitivity, while the EN’s effort did not monotonically increase in the pay-performance sensitivity level. More importantly, we found that as efforts tended to be more complementary, the optimal pay-performance sensitivity tended to approach those that maximized the efforts exerted by the EN and the VC.

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Section: Introductionmentioning

confidence: 99%