“Information Design in the Entrepreneur-Investor Relationships”

(Job Market Paper)

Abstract: I consider an environment in which entrepreneurs can costlessly generate information about the quality of their projects prior to contracting with investors to fund the projects. The Investors face a moral hazard problem, since entrepreneurs may privately divert the funding for private consumption. I identify conditions under which the efficient amount of information about project quality is generated, and show how the amount of information generated changes with project investment costs, degree of Entrepreneur’s moral hazard problem, and prior beliefs about project quality. When each investor bargains with one entrepreneur I find that the efficient amount of information is generated only if the bargaining power of the entrepreneur is high enough. When two or more entrepreneurs compete for each investor’s funding, the efficient amount of information is generated by an entrepreneur only if the prior belief about the quality of his competitor’s project is high enough.

Draft link: JMP Oleg Muratov