Banks versus venture capital when the venture capitalist values private benefits of control

If control of their firms allows entrepreneurs to derive private benefits, it also allows other controlling parties. Private benefits are especially relevant for venture capitalists, who typically get considerable control in their portfolio firms, but not for banks, which are passive loan providers. We incorporate this difference between banks and venture capital and analyze entrepreneurs' financing strategy between the two. We find that, in all strict Nash Equilibria, entrepreneurs who value private benefits more choose banks while the rest choose venture capital. Thus, bank-financed entrepreneurs allocate more resources to tasks that yield private benefits while VC-backed entrepreneurs have higher profitability

Banks versus venture capital when the venture capitalist values private benefits of control

If control of their firms allows entrepreneurs to derive private benefits, it also allows other controlling parties. Private benefits are especially relevant for venture capitalists, who typically get considerable control in their portfolio firms, but not for banks, which are passive loan providers. We incorporate this difference between banks and venture capital and analyze entrepreneurs' financing strategy between the two. We find that, in all strict Nash Equilibria, entrepreneurs who value private benefits more choose banks while the rest choose venture capital. Thus, bank-financed entrepreneurs allocate more resources to tasks that yield private benefits while VC-backed entrepreneurs have higher profitability.bank, control, entrepreneurship, private benefit, venture capital

Sharing the Risk of Settlement Failure: Synopsis

Two policies toward payments-system risk are common, but superficially appear to be contradictory. One policy is to restrict the exposure to risk generated by one participant to other participants who are, by one measure or another, directly concerned with the risky participant. The other policy is to provide a "safety net," typically provided by government and funded by taxes collected from all participants and even from non-participants, to share losses due to "systemic risk." In this paper, we provide a model in which both of these policies can be constituents of an economically efficient regime of payments-risk management.

Can a "credit crunch" be efficient?

Two observations have sometimes been viewed as evidence that the equilibrium allocations of intermediated credit markets are inefficient. First, low-income households' marginal propensity to consume is close to unity. Second, even high-income households seem to face nonprice constraints during recessions. This paper presents a model that possesses both of these features. (A recession is modeled as an economy in which the equilibrium level of investment is at its lowest possible level.) However, contrary to the conventional view, the equilibrium of this model is ex ante efficient. The model also sheds light on some historical episodes of credit restraint.Credit

Delayed financial disclosure: Mexico's recent experience

This article documents a delay in the public release of Mexican international reserve data in the months before Mexico's debt crisis at the end of 1994. The article establishes that in that year investors did not know the level of Mexican reserves before October; yet this lack of information did not seem to reduce investor confidence in the Mexican economy. The article does not establish whether the delay in releasing reserve data was due to logistical problems or to a government strategy. The possibility that the delay was strategic is evaluated by developing an economic model that captures some of the principal constraints facing the Mexican government in 1994 and that makes explicit the conflicting objectives of the government and investors. The model shows that in such an environment with private information, strategic delay can occur in equilibrium if investors are uncertain about the cause of the delay.Mexico ; Devaluation of currency ; Peso, Mexican

Financial Intermediation

The savings/investment process in capitalist economies is organized around financial intermediation, making them a central institution of economic growth. Financial intermediaries are firms that borrow from consumer/savers and lend to companies that need resources for investment. In contrast, in capital markets investors contract directly with firms, creating marketable securities. The prices of these securities are observable, while financial intermediaries are opaque. Why do financial intermediaries exist? What are their roles? Are they inherently unstable? Must the government regulate them? Why is financial intermediation so pervasive? How is it changing? In this paper we survey the last fifteen years' of theoretical and empirical research on financial intermediation. We focus on the role of bank-like intermediaries in the savings-investment process. We also investigate the literature on bank instability and the role of the government.

Declining valuations and equilibrium bidding in central bank refinancing operations

It is argued that bidders in liquidity-providing central bank operations should typically possess declining marginal valuations. Based on this hypothesis, we construct an equilibrium in central bank refinancing operations organised as variable rate tenders. In the case of the discriminatory pricing rule, bid shading does not disappear in large populations. The predictions of the model are shown to be consistent with the data for the euro area. JEL Classification: D44, E52discriminatory auction, Eurosystem, Open market operations, uniform price auction