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  • HKW_2019

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Raising Capital from Heterogeneous Investors

Research output: Contribution to journalJournal article

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<mark>Journal publication date</mark>1/03/2020
<mark>Journal</mark>The American Economic Review
Issue number3
Volume110
Number of pages33
Pages (from-to)889-921
Publication statusPublished
Original languageEnglish

Abstract

A firm raises capital from multiple investors to fund a project. The project succeeds only if the capital raised exceeds a stochastic threshold, and the firm offers payments contingent on success. We study the firm's optimal unique-implementation scheme, namely the scheme that guarantees the firm the maximum payoff. This scheme treats investors differently based on size. We show that if the distribution of the investment threshold is log-concave, larger investors receive higher net returns than smaller investors. Moreover, higher dispersion in investor size increases the firm's payoff. Our analysis highlights strategic risk as an important potential driver of inequality.

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Copyright 2020 American Economic Association. All rights reserved