Venture Capital Financing, Moral Hazard and Learning

CEPR Discussion Paper Series Number 1738

Posted: 28 Jun 1998

See all articles by Dirk Bergemann

Dirk Bergemann

Yale University - Cowles Foundation - Department of Economics; Yale University - Cowles Foundation

Date Written: November 1997


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 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 inefficiently early end to the project. A positive liquidation explains the adoption of strip financing or convertible securities. Finally, relationship financing, including monitoring and the occasional replacement of management improves the efficiency of the financial contracting.

JEL Classification: D83, D92, G24, G31

Suggested Citation

Bergemann, Dirk, Venture Capital Financing, Moral Hazard and Learning (November 1997). CEPR Discussion Paper Series Number 1738. Available at SSRN:

Dirk Bergemann (Contact Author)

Yale University - Cowles Foundation - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States
203-432-3592 (Phone)
203-432-2128 (Fax)


Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

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