Risky Investment Contracts with the Theory of Games

There exists the information asymmetry between venture capitalists and venture entrepreneurs which can cause the problem of moral hazard. To deal with the problem of moral hazard, it is necessary to choose the proper investment tool and compensation policy. A game model is set up, which helps to study which tool is the best investment tool among debt, common stock, convertible preferred stock and convertible debt, given the venture entrepreneurs can be made work hard. By the analysis of the model, a fact can be found that convertible preferred stock and convertible debt is the best way if the better result is twice larger than the original capital. Otherwise, the form of debt will be better.

Project Supported:

Clc Number:

F830.59 F224