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date: 04 July 2020

Abstract and Keywords

This article covers time-inconsistent (TI) preferences and venture capital contracting. The first part provides an overview of the transactional hazards faced by venture capitalists and the governance devices used to provide entrepreneurs with proper incentives. The second part begins by setting forth a general model of TI preferences. It then extends it to the venture capital context, using it to explain the behavior of TI entrepreneurs and time-consistent (TC) venture capitalists. It ends by discussing the role played by venture capital contracts in causing entrepreneurs to internalize the costs of their TI agency misconduct. The third part first examines the agency relationship between TI venture capitalists and TC investors in venture capital funds. It then introduces the concept of “hidden-risk contracting” to describe the relationship between entrepreneurs, venture capitalists, and investors and, in particular, the role of venture capitalists in transmitting positive and negative externalities between entrepreneurs and investors.

Keywords: venture capitalists, entrepreneurs, investors, time-consistent, venture capital contracts, agency misconduct, hidden-risk contracting

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