Model for Design of Portfolio Venture Investment Contract When Taking Moral Hazards into Account

Abstract

Portfolio investment is adopted by the venture capital to diversify those risks involved in project selection, investing or operating so that the venture capitalist can expect a relatively stable income and lower financing risks. Based on the design of portfolio investment contract with unlimited funds developed by Kanniainen and Keuschnigg, and Inderst et al., this article makes a modification and presents a model given the limitation of funds available for the venture capitalist. It is demonstrated that the marginal benefit of efforts paid by the entrepreneurs exceeds the marginal cost, given the limitation of funds available, which will conduce to a high-level engagement of the entrepreneurs. Thus, by adopting the design of renegotiation contract, the venture capitalist can manage to stimulate the entrepreneurs to make efforts, which is to result in moral hazard reduction.