Entrepreneurial Incentives and the Role of Initial Coin Offerings

47 Pages Posted: 5 Mar 2019 Last revised: 10 May 2019

See all articles by Rodney Garratt

Rodney Garratt

University of California, Santa Barbara (UCSB)

Maarten R.C. van Oordt

Tinbergen Institute; VU University Amsterdam

Date Written: February 13, 2019


Initial coin offerings (ICOs) are a new mode of financing start-ups that saw an explosion in popularity in 2017 but declined in popularity in the second half of 2018 as regulatory pressure, instances of fraud and reports of poor performance began to undermine their reputation. We examine whether ICOs are a passing fad or a worthwhile form of financing with beneficial economic properties. We do so by examining how financing a start-up through an ICO changes the incentives of an entrepreneur relative to debt and venture capital financing. Depending on market characteristics, an ICO can result in a better or worse alignment of the interests of the entrepreneur and the investors compared with conventional modes of financing. Notably, an ICO can be the only form of financing that induces optimal effort and hence maximizes the net present value of the start-up, and there are projects that should not take place at all unless they can be financed through an ICO.

Keywords: asset pricing, e-money, initial coin offering, crypto, exchange rates

JEL Classification: G32

Suggested Citation

Garratt, Rodney and van Oordt, Maarten R.C. and van Oordt, Maarten R.C., Entrepreneurial Incentives and the Role of Initial Coin Offerings (February 13, 2019). Available at SSRN: https://ssrn.com/abstract=3334166 or http://dx.doi.org/10.2139/ssrn.3334166

Rodney Garratt (Contact Author)

University of California, Santa Barbara (UCSB) ( email )

South Hall 5504

Maarten R.C. Van Oordt

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA

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