Sequential Investments and Options to Own

Nöldeke, Georg; Schmidt, Klaus M.

doi:10.2307/2556087

Cited by 156 publications

(105 citation statements)

References 10 publications

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“…In fact, they show that when 4 There are several other papers that focus on noncooperative investments. Chung (1991), Aghion, Dewatripont, and Rey (1994), and Noldeke and Schmidt (1998) propose contracts that while incomplete still may induce efficient investments. These papers have in common that at the renegotiation stage one party holds all the bargaining power.…”

Section: Introductionmentioning

confidence: 99%

Firm‐Sponsored General Training

Balmaceda

2005

Journal of Labor Economics

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JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.. Universidad de ChileThis article analyzes firm and worker's incentives to invest in general and specific training when these are separable in the production technology and wages are determined by the outside-option principle. It is shown that firms pay for general training, while workers receive the full return on it, and firms and workers share both the costs and benefits of specific training. The case of delayed general training is also studied. When general training is delayed, it is shown that the strategic complementarity between specific and general training increases the worker's incentives to invest in specific training.

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Section: Introductionmentioning

confidence: 99%

Firm‐Sponsored General Training

Balmaceda

2005

Journal of Labor Economics

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“…Substituting the Nash-equilibrium level of e¤ort (18) into the entrepreneurs'objective function (16) and VC's objective function, (17), gives (19) and (20).…”

Section: Discussionmentioning

confidence: 99%

“…We assume that the proceeds from divesting the start-up are lower than the proceeds from continuing with the original VC and, for simplicity, are normalized to zero. 16 The VC now has the option to bargain with one entrepreneur for the continuation of only her start-up and the termination of the other start-up, which we denote as "bilateral"bargaining.…”

Section: Optimal Portfolio Sizementioning

confidence: 99%

Size and Focus of a Venture Capitalist's Portfolio

Fulghieri

Sevilir

2004

SSRN Journal

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In this paper we take a portfolio approach to analyze the investment strategy of a venture capitalist (VC), and study the optimal size of a VC's portfolio. We show that portfolio size and scope a¤ect the incentives of both entrepreneurs to exert e¤ort and VCs to make start-up speci…c investment. A small portfolio improves entrepreneurial incentives because it allows the VC to concentrate his limited human capital on a smaller number of start-ups, adding more value to each start-up. In addition, by holding a small portfolio, the VC commits not to extract higher rents from the entrepreneurs, with a positive impact on their incentives. A large and focused portfolio is bene…cial for the VC because it allows the VC to reallocate his limited resources and human capital from one start-up to another in case of a startup failure. Furthermore, a large and focused portfolio allows the VC to extract greater rents from the start-ups because the VC can induce competition for his limited resources. We show that the VC …nds it optimal to limit his portfolio size when start-ups have higher quality prospects ex ante, that is, when providing strong entrepreneurial incentives is most valuable. The VC expands his portfolio size only when start-up fundamentals are more moderate and only when he can form a su¢ ciently focused portfolio.Finally we show that the VC may …nd it optimal to engage in portfolio management by divesting some of his start-ups early since this strategy allows him to extract a greater surplus from the remaining start-ups in his portfolio. Surprisingly, we …nd that under certain conditions, portfolio management, despite being socially ine¢ cient ex post, improves ex ante social welfare by enlarging the set of economically viable start-ups.

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“…Our paper attempts to help fill this gap by focusing on the role of termination rights. 1 Compared to previous work on strategic alliance and venture capital contracts (Cornelli and Yosha (2003), Dessein (2005), Schmidt (2003), and Nöldeke and Schmidt (1998)), we de-emphasize the role of firm ownership. Our theoretical framework relates to the literature on financial contracting (Aghion and Bolton (1992), Aghion and Tirole (1994)).…”

Section: Introductionmentioning

confidence: 99%