valuation and control in venture finance this paper presents the model of a relationship between a venture capitalist and an entrepreneur engaged in the formation of a new firm i assume that the entrepreneur derives private nonpecuniary benefits from having some control over the firm i show that to separate the entrepreneur s value of control from the firm s expected payoff the venture capitalist demands disproportionately higher control rights than the size of his equity investment the entrepreneur is compensated for a greater loss of control through better terms of financing ability to extract higher rents from asymmetric information and improved risk sharing venture capital firms often finance projects which at the time of funding have neither revenues nor even a product in existence however by using an intricate system of control rights venture capitalists can overcome many failures inevitable in a complex task of converting entrepreneurial talent into companies products and markets

financial contracting theory meets the real world an empirical analysis of venture capital contracts we compare the characteristics of real world financial contracts to their counterparts in financial contracting theory we do so by studying the actual contracts between venture capitalists vcs and entrepreneurs the distinguishing characteristic of vc financings is that they allow vcs to separately allocate cash flow rights board rights voting rights liquidation rights and other control rights we describe and measure these rights we then interpret our results in relation to existing financial contracting theories we also describe the interrelation and the evolution across financing rounds of the different rights query 1 query 2

academic earmarks and the returns to lobbying abstract in this paper we estimate the returns to lobbying by universities to motivate our empirical work we develop a simple theoretical model of university lobbying for academic earmarks our statistical analysis shows that universities represented by a house appropriations committee hac or senate appropriations committee sac member spend less money on lobbying than those that are not represented in addition using instrumental variables estimations we show that universities without hac or sac representation may receive some benefit to lobbying for earmarks although in many estimations this benefit is not statistically different from zero however for universities with hac or sac representation a 10 percent increase in lobbying yields an additional 2 8 percent or 3 5 percent increase in earmarks respectively this suggests that there are large returns to lobbying for academic earmarks if a university is represented by a member of one the hac or sac but little or no return if not

unforeseen contingencies and incomplete contracts we scrutinize the conceptual framework commonly used in the incomplete contract literature this literature usually assumes that contractual incompleteness is due to the transaction costs of describing or of even foreseeing the possible states of nature in advance we argue however that such transaction costs need not interfere with optimal contracting i e transaction costs need not be relevant provided that agents can probabilistically forecast their possible future payoffs even if other aspects of the state of the nature cannot be forecast in other words all that is required for optimality is that agents be able to perform dynamic programming an assumption always invoked by the incomplete contract literature the foregoing optimality result holds very generally provided that parties can commit themselves not to renegotiate moreover we point out that renegotiation may be hard to reconcile with a framework that otherwise presumes perfect rationality however even if renegotiation is allowed the result still remains valid provided that parties are risk averse

senate representation and coalition building in distributive politics p7 vhe senate s equal representation of states shapes coalition building in distributive politics the great variation in state population means that some states have far greater need for federal fttnds than others but all senators have equal voting weight as a result even though all senators votes are of equal value to the coalition builder they are not of equal prwice coalition builders can include benefits for small states at considerably less expense to program budgets than comparable benefits for more populous states building on formal models of coalition building two hypotheses are developed and tested first coalition builders will seek out less costly members to build supportive coalitions efficiently second the final outcomes of distributive policy will more closely reflect the preferences of small state senators than large state senators the hypotheses are tested by examining the 1991 and 1997 98 reauthorizations of federal surface transportation programs the findings support both hypotheses

policy specific information and informal agenda power in gilligan and krehbiel s models of procedural choice in legislatures a committee exerts costly effort to acquire private information about an unknown state of the world subsequent work on expertise delegation and lobbying has largely followed this approach in contrast we develop a model of information as policy valence we use our model to analyze a procedural choice game focusing on the effect of transferability i e the extent to which information acquired to implement one policy option can be used to implement a different policy option we find that when information is transferable as in gilligan and krehbiel s models closed rules can induce committee specialization however when information is policy specific open rules are actually superior for inducing specialization the reason for this surprising result is that a committee lacking formal agenda power has a greater incentive to exercise informal agenda power by exerting costly effort to generate high valence legislation

renegotiation and information revelation over time the case of optimal labor contracts the paper analyzes the issue of commitment in grossman and hart s model of optimal labor contracts under asymmetric information about firm profitability we extend their framework by allowing employment to vary over time at equidistant intervals when both parties can precommit ex ante not to renegotiate the contract this replicates the grossman hart outcome each subperiod when precommitment is not possible information revealed through the contract can create pareto improving renegotiation opportunities and the issue of optimal information revelation arises the paper analyzes the impact of ex post pareto improving renegotiations on the optimal contract

information and control in ventures and alliances this paper develops a theory of control as a signal of congruence of objectives and applies it to nancial contracting between an investor and a privately informed entrepreneur we show that formal investor control is i increasing in the information asymmetries ex ante ii increasing in the uncertainty surrounding the venture ex post iii decreasing in the entrepreneur s resources and iv increasing in the entrepreneur s incentive consict in contrast real investor control that is actual investor interference is decreasing in information asymmetries control rights are further such that control shifts to the investor in bad states of nature

lessons from privatization in britain abstract the process of privatizing most of britain s major public enterprises yields interesting conclusions on the three related issues 1 a problem of policy assignment arose in the use of privatization and liberalization to achieve both allocative and productive efficiency 2 evidence on the behavior of the public enterprises is consistent with an organizational model of the relevant principal agent relationships predicting certain types of slack absorption 3 the privatization process entailed policy choices that bear on their future productive efficiency effectiveness of monitoring by the market for corporate control and allocative efficiency provision for regulation

the industrial organization of congress or why legislatures like firms are not organized as markets this paper provides a theory of legislative institutions that parallels the theory of the firm and the theory of contractual institutions like market institutions legislative institutions reflect two key components the goals or preferences of individuals here representatives seeking reelection and the relevant transactions costs we present three conclusions first we show how the legislative institutions enforce bargains among legislators second we explain why given the peculiar form of bargaining problems found in legislatures specific forms of nonmarket exchange prove superior to market exchange third our approach shows how the committee system limits the types of coalitions that may form on a particular issue

reliability risk aversion and the positive theory of public enterprise abstract this paper extends the theory of reliability by developing it in the context of the positive theory of public enterprise the public enterprise is assumed to be a size maximiser and to choose price and capacity in the face of uncertain demand and subject to an expected profit target it is shown that a risk averse public enterprise will set its levels of price capacity and reliability either all above or all below those of a risk neutral public enterprise depending on the value of the elasticity of expected sales relative to unity in addition it is shown that price changes may be superior to capacity changes as a guide to changes in reliability

what do economists tell us about venture capital contracts venture capital markets are characterized by multiple incentive problems and asymmetric information in an uncertain environment all kinds of agency problems are present moral hazard adverse selection hold up problems window dressing etc entrepreneurs and venture capitalists enter into contracts that influence their behavior and mitigate the agency costs in particular they select an appropriate kind and structure of financing and specify the rights as well as the duties of both parties the typical features of venture capital investments are an intensive screening and evaluation process an active involvement of venture capitalists in their portfolio companies a staging of capital infusions the use of special financing instruments such as convertible debt or convertible preferred stock syndication among venture capitalists or a short investment horizon

robust financial contracting and the role of venture capitalists we derive a role for inside investors such as venture capitalists in resolving various agency problems that arise in a multistage financial contracting problem absent an inside investor the choice of securities is unlikely to reveal all private information and overinvestment may occur an inside investor however always makes optimal investment decisions if and only if he holds a fixed fraction contract where he always receives a fixed fraction of the project s payoff and finances that same fraction of future investments this contract also eliminates any incentives of the venture capitalist to misprice securities issued in later financing rounds in this article we develop a model of financial contracting with multiple investment decisions and show how conflicts of interest and informational asymmetries can be effectively resolved by an inside investor i e an investor who not only provides capital but also works closely with the firm monitors it frequently and is generally very well informed about the firm s prospects and investment opportunities venture capitalists are obvious examples of inside investors and their function has been an important motivation for this article banks especially in japan and germany are also involved in monitoring and can be viewed as playing the role of inside investors in this article we examine the potential benefits of inside investors in a context where there are no restrictions beyond limited liability on the type of financial contracts that can be written we address a basic financial contracting problem involving an entrepreneur who has an idea for a project but does not have sufficient capital to fund it an important assumption is that there are several stages in the project s development and that a decision must be made at each stage whether the project should be continued or abandoned if the project is continued the amount of additional capital to be invested must also be determined we assume that the entrepreneur as an insider observes private information about the project s profitability at each stage this information is not

financial intermediaries ownership structure and monitored finance evidence from japan this paper introduces new and unique data from 127 japanese private equity funds that enable a first ever direct comparison of individual owner manager structures versus financial intermediation structures in terms of the governance provided to investee companies through private equity funds the data indicate individual owner manager structures financial disintermediation give rise to much smaller portfolios of entrepreneurial firms and more advice to entrepreneurs across the scope of different financial intermediation structures including banks life insurance companies securities firms corporations and government bodies there are further differences in the provision of governance and value added advice provided to investees the data further indicate us affiliated funds in japan are more likely to have smaller portfolios and provide more advice to entrepreneurial companies possibly due to a greater skill set in providing advice to facilitate the development of small entrepreneurial firms

venture capital financing moral hazard and learning we consider the provision of venture capital in a dynamic agency model the value of the venture project is initially uncertain and more information arrives by developing the project the allocation of the funds and the learning process are subject to moral hazard the optimal contract is a time varying share contract which provides intertemporal risk sharing between venture capitalist and entrepreneur the share of the entrepreneur reflects the value of a real option the option itself is based on the control of the funds the dynamic agency costs may be high and lead to an inefficient early stopping of the project a positive liquidation value explains the adoption of strip financing or convertible securities finally relationship financing including monitoring and the occasional replacement of the management improves the efficiency of the financial contracting

contract renegotiation and coasian dynamics consider a long term relationship between a seller and a buyer whose valuation for a per period service or a durable good is private as trade progresses the valuation will be partially revealed and it may be impossible for the parties to commit ex ante not to take advantage of this we analyse this situation first by supposing that the parties can sign a sequence of short term contracts and secondly by supposing that they can sign a long term contract but cannot commit not to renegotiate it later we find a close relationship in the second case between the optimal long term contract and the non commitment outcome in the standard coasian durable good model our results also have implications for hidden information principal agent models

preplanned exit strategies in venture capital abstract this paper empirically considers the role of preplanned exits the investor s initial strategy to sell the investee firm via an acquisition or an initial public offering ipo at the time of initial contract with the entrepreneur legal conditions and investor versus investee bargaining power in the allocation of cash flow and control rights in entrepreneurial finance we introduce a sample of 223 entrepreneurial investee firms financed by 35 venture capital funds in 11 continental european countries and these data indicate the following first preplanned acquisition exits are associated with stronger investor veto and control rights a greater probability that convertible securities will be used and a lower probability that common equity will be used the converse is observed for preplanned ipos second investors take fewer control and veto rights and use common equity in countries of german legal origin relative to socialist scandinavian and french legal origin third more experienced entrepreneurs are more likely to get financed with common equity and less likely to be financed with convertible preferred equity while more experienced investors are more likely to use convertible preferred equity and less likely to use common equity

committee characteristics and re election margins an empirical investigation of the us house models of legislative organization frequently begin with the premise that the committee system serves the re election interests of incumbent legislators attempts to substantiate this notion empirically have been unsuccessful nevertheless the notion lives on nourished by a stylized characterization of the committee system in the standard model committees have jurisdictional monopolies over specialized policy areas and legislators gravitate toward those committees that deal most closely with the policy concerns of their constituents contrary to this simplifying characterization the degree of monopoly control and policy specialization varies across standing committees in the us congress some committees have wide jurisdictions and attract members with diverse policy preferences jurisdictional overlap and resulting turf battles are common aspects of congressional sessions we suggest here that these realities warrant a re opening of the empirical investigation into the link between electoral success and committee characteristics our findings indicate that assignment to a committee with a relatively high degree of monopoly control increases a member s vote share and that assignment to a narrowly focused specialized committee does not

congressional committees and the political economy of federal outlays the literature on the organization of the united states congress has been dominated by distributive and informational theory one important source of disagreement between these two theories is their characterization of whether individual legislators can engage in pork barrel activities here we provide evidence which indicates that the pork barrel is alive and well in the contemporary united states congress we focus on whether members of power and constituency committees can direct disproportionate federal expenditures to their districts finding strong and systematic evidence of pork barrel activities by committee members provides empirical support for distributive theories of legislative organization

the committee assignment process and the conditional nature of committee bias the view that congressional committees tend to be biased subsets of their parent chambers provides the foundations for a substantial body of theoretical literature on distributive politics and legislative structure more recent revisionist work suggests that committees composed of preference outliers are in fact rare we reject the categorical account of preference outliers a priori and elaborate conditions under which committees should be unrepresentative of their parent chambers we argue that the most widely available and frequently used data floor roll call votes are inappropriate to the task of assessing outlier predictions in any form finally we conduct a differentiated set of hypothesis tests within one policy jurisdiction to illustrate the characteristics of evidence and analysis necessary to evaluate alternative theoretical accounts of legislative organization the appearance of policy relevant biases in congressional work groups we conclude is not so much rare as it is conditional and we suggest several conditions on which future models of legislative organization should build

free trade fair trade strategic trade and protectionism in the u s congress 1987 88 what conditions led the one hundredth congress of the united states to enact fair trade and strategic trade policies into law during 1987 88 political partisanship is an important force with democrats supporting and republicans opposing all types of trade intervention otherwise the coalitions of support for and opposition to the various trade policies differ particularly in the senate in that body international business is associated with support for fair trade policies and with opposition to classical protectionism while domestic u s business is associated with support for classical protectionism liberalism is strongly associated with support for fair and strategic trade policies but is not associated with classical protectionism in the house of representatives the long standing protectionist coalition remains an influence few forces in support of free trade remain in u s politics changing international market conditions rapidly affect the making of u s trade policy

a theory of debt and equity diversity of securities and manager shareholder congruence this paper shows how the optimal financial structure of a firm complements incentive schemes to discipline managers and how the securities return streams determine the claim holders incentives to intervene in management the theory rationalizes 1 the multipucity of securities 2 the observed correlation between return streams and control rights of securities and 3 the partial congruence between managerial and equity holder preferences over policy choices and monetary rewards as well as the low level of interference of equity in management the theory also offers new prospects for a reappraisal of the earlier corporate finance literature

price quality and regulation an analysis of price capping and the reliability of electricity supply abstract this paper examines the relationship between price cap regulation and the reliability of supply of a private monopoly two situations are considered one in which reliability is excluded from the price cap and one in which it is included if reliability is excluded it is shown that there is a tendency for the firm to protect profits by lowering reliability when cost increases must be absorbed whereas if reliability is included then this tendency is eliminated however this inclusion creates an incentive for the firm to exploit the positive relationship between price and reliability when cost increases can be passed on but this problem can be controlled by reducing the exogenous weight applied to reliability in the price cap formula

new resources and new ideas private equity for small businesses abstract private equity for rapidly growing small business is raised primarily from the organized venture capital market and the informal market comprised of high net worth individuals or angel investors we discuss commercially and publicly available data on private equity the research findings of studies that use these data and some of the more important questions that the available data have been unable to address