Technological Determinants of Financial Constraints

Starmans, Jan

doi:10.2139/ssrn.3067223

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Technological Determinants of Financial Constraints

53 Pages Posted: 10 Nov 2017 Last revised: 6 Feb 2022

See all articles by Jan Starmans

Jan Starmans

Stockholm School of Economics - Department of Finance; European Corporate Governance Institute (ECGI); Swedish House of Finance

Date Written: February 4, 2022

Abstract

This paper studies the investor's investment decision in a standard financial contracting model. The investor chooses between entrepreneurs with heterogeneous production technologies who generate different probability distributions of cash flow under effort. I provide a complete characterization of optimal contracts, agency rents, and the investor's investment decision. Differences in entrepreneurs' production technologies imply differences in optimal contracts and agency rents across equally productive entrepreneurs, which biases and potentially distorts the investor's investment decision. The results provide a complete characterization of entrepreneurs' financial constraints in the presence of heterogeneous production technologies and uncover a fundamental link between production technologies, financial contracts, and financial constraints.

Keywords: Moral hazard, contractual constraints, financial constraints, innovation.

JEL Classification: D86, G30, G32, O31.

Suggested Citation: Suggested Citation

Starmans, Jan, Technological Determinants of Financial Constraints (February 4, 2022). Available at SSRN: https://ssrn.com/abstract=3067223 or http://dx.doi.org/10.2139/ssrn.3067223