Persistent Blessings of Luck

44 Pages Posted: 22 Feb 2017 Last revised: 8 Aug 2018

See all articles by Lin William Cong

Lin William Cong

Cornell University

Yizhou Xiao

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Date Written: August 6, 2018


Persistent fund performance in venture capital is often interpreted as evidence of differential abilities among managers. We present a dynamic model of venture investment with endogenous fund heterogeneity and deal flow that produces performance persistence without innate skill difference. Investors work with multiple funds and use tiered contracts to manage moral hazard dynamically. Recent successful funds receive continuation contracts that encourage greater innovation, and subsequently finance innovative entrepreneurs through assortative matching. Initial luck thus exerts an enduring impact on performance by altering managers' future investment opportunities. The model generates implications broadly consistent with empirical findings, such as short-term performance persistence and long-term mean reversion, outperforming funds' appeal to innovative entrepreneurs even with worse terms, and the link between failure-tolerance and innovation. Initial luck may also amplify the effect of innate skill differences.

Keywords: Private Equity, Venture Capital, Innovation, Delegated Investment, Performance Persistence, Manager Skills, Dynamic Contracts

JEL Classification: G10, L26, O31, G24

Suggested Citation

Cong, Lin and Xiao, Yizhou, Persistent Blessings of Luck (August 6, 2018). Available at SSRN: or

Lin Cong (Contact Author)

Cornell University ( email )

Ithaca, NY 14853
United States


Yizhou Xiao

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong


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