Security Design with Endogenous Implementation Choice
40 Pages Posted: 30 Jan 2020
Date Written: December 1, 2019
Motivated by security-based Crowdfunding, we study a model of project financing, where a cashless entrepreneur: i) has private information about her project; ii) might be associated with a negative-NPV project, and; iii) has limited liability. We find that the optimal security is debt accompanied by a clause that effectively, provides the entrepreneur with the option of not implementing the project when it is socially wasteful. We show that relaxing the implicit assumption that the entrepreneur is obliged to implement the project after raising capital: i) prevents market breakdown; ii) leads to more efficient allocations of resources, and; iii) strengthens the entrepreneur's incentive to exert productivity-increasing effort.
Keywords: Market Freeze, Security Design, Security-based Crowdfunding
JEL Classification: D82, D83, D86, G11, G28
Suggested Citation: Suggested Citation