The Financing of Innovation: Learning and Stopping

This paper considers the financing of a research project under uncertainty about the time of completion and the probability of eventual success.The uncertainty about future success gradually diminishes with the arrival of additional funding.The entrepreneur controls the funds and can divert them.We distinguish between relationship financing, meaning that the entrepreneur's allocation of the funds is observable, and arm's length financing, where it is unobservable.We find that equilibrium funding stops altogether too early relative to the efficient stopping time in both financing modes.We characterize the optimal contracts and equilibrium funding decisions.The financial constraints will typically become tighter over time under relationship finance, and looser under arm's length financing.The trade-off is that while relationship financing may require smaller information rents, arm's length financing amounts to an implicit commitment to a finite funding horizon.The lack of such a commitment under relationship financing implies that the sustainable release of funds eventually slows down.We obtain the surprising result that arm's length contracts are preferable in a Pareto sense.innovation;finance;venture capital;learning

Venture Capital Financing, Moral Hazard and Learning

We consider the provision of venture capital in a dynamic agency model. The value of the venture project is initially uncertain and more information arrives by developing the project. The allocation of the funds and the learning process are subject to moral hazard. The optimal contract is a time-varying share contract which provides intertemporal risk-sharing between venture capitalist and entrepreneur. The share of the entrepreneur reflects the value of a real option. The option itself is based on the control of the funds. The dynamic agency costs may be high and lead to an ine¢cient early stopping of the project. A positive liquidation value explains the adoption of strip financing or convertible securities. Finally, relationship financing, including monitoring and the occasional replacement of the management improves the efficiency of the financial contracting.venture financing;optimal stopping;dynamic financial constraints;share contracts;security design

Contentious Contracts

This paper offers an explanation of rationally incomplete contracts where incompleteness refers to unforeseen contingencies. Agents enter a relationship with two-sided moral hazard in which a commitment to discard parts of the joint resources may be ex ante efficient. This happens through costly legal dispute which arises when contract terms are missing for the undesirable outcomes. We show that an optimal contract needs only to specify the obligation for the more litigious party to assure a certain output level - the threshold between foreseen and unforeseen contingencies - and a linear sharing rule for the foreseen contingencies. If litigation reveals some information about the e¤ort levels of the agents, less costly dispute is typically needed and the allocation will improve.incomplete contracts;unforeseen contingencies;burning money;team production;contract law

Venture Capital Financing, Moral Hazard and Learning

International audienceWe consider the provision of venture capital in a dynamic agency model. The value of the venture project is initially uncertain and more information arrives by developing the project. The allocation of the funds and the learning process are subject to moral hazard. The optimal contract is a time-varying share contract which provides intertemporal risk-sharing between venture capitalist and entrepreneur. The share of the entrepreneur reflects the value of a real option. The option itself is based on the control of the funds. The dynamic agency costs may be high and lead to an inefficient early stopping of the project. A positive liquidation value explains the adoption of strip financing or convertible securities. Finally, relationship financing, including monitoring and the occasional replacement of the management improves the efficiency of the financial contracting

Safety Monitoring, Capital Structure, and "Financial Responsibility"

Firms will exert too little preventive care if damages are likely to exceed their equity. This is particularly important for environmental and product liability and motivates the current discussion about extending liability to creditors. We propose a model where the firm can be financed by equity, bank debt or publicly traded debt. There is a moral hazard problem about the choice of care that can be mitigated through stochastic monitoring of its safety standards. We show that the optimal allocation can always be implemented by a liability regime of "financial responsibility", that is mandatory liability coverage that can be fulfilled either by an insurer or by a lender. We find that the first best can only be achieved if the defendants are fully liable. This result is in contrast to related models which find liability below the level of harm optimal, and we show that the difference is due to the inclusion of safety monitoring. Financial responsibility is strictly superior to lender liability alone or strict liability without extended liability, but their relative ranking may vary.lender liability;compulsory insurance;choice betwwen private and public debt;limited liability effect

Collateral, Renegotiation and the Value of Diffusely Held Debt

Debt with many creditors is analyzed in a continuous-time pricing model of the levered firm. We specifically allow for debtor opportunism vis-a-vis a non-coordinated group of creditors, in form of repeated strategic renegotiation offers and default threats. We show that the creditors' initial entitlement to non-collateralized assets will be expropriated through exchange offers. Exchange offers successively increase the level of collateral until all assets are fully collateralized. The ex ante optimal debt contract is neither fully collateralized nor without any collateral. Diffusely held debt allows for a larger debt capacity and bears lower credit risk premia than privately held debt. We derive simple closed-form solutions for the value of equity and defaultable bonds. Numerical estimates show that the bond valuation is very sensitive to the correct specification of the debt renegotiation model.

Nährstoffsalden und Nitratgehalte des Sickerwassers in ökologisch und konventionell bewirtschafteter Ackerflächen

Die Nährstoffsalden ökologisch bewirtschafteter Betriebe lagen bei den Hauptnährstoffen Stickstoff, Phosphat und Kali deutlich unter den Salden konventionell bewirtschafteter Betriebe. Bei Phosphat und Kali wurden negative Salden festgestellt. Bei mittel- und langfristiger Betrachtung werden die pflanzenverfügbaren Bodengehalte sinken. Unter 10 mg/100 g Boden muss im Rahmen der zugelassenen Möglichkeiten eine Erhaltungsdüngung durchgeführt werden, wenn das mögliche Ertragspotential ausgeschöpft werden soll. Die dargestellten Unterschiede der Stickstoffsalden bei konventioneller und ökologischer Bewirtschaftung werden durch Untersuchungsergebnisse hinsichtlich der Nitratkonzentration im Sickerwasser bestätigt. Nach unseren Untersuchungen lag die Nitratkonzentration unterhalb des durchwurzelbaren Raumes unter ökologisch bewirtschafteten Flächen deutlich unter den Gehalten konventionell bewirtschafteter Flächen. Sie lagen aber im Mittel über dem Richtwert für Trinkwasser von 25mg/l