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Raising Capital from Heterogeneous Investors

Research output: Working paper

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Publication date09/2018
Place of PublicationLancaster
PublisherLancaster University, Department of Economics
<mark>Original language</mark>English

Publication series

NameEconomics Working Papers Series

Abstract

A rm raises capital from multiple investors to fund a project. The project succeeds
only if the capital raised exceeds a stochastic threshold, and the rm offers payments contingent on success. We study the rm's optimal unique-implementation scheme, namely the scheme that guarantees the rm the maximum payoff. This scheme pays investors differential net returns (per unit of capital) depending on the size of their investments. 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 rm's payoff. Our analysis highlights strategic risk as an important potential driver of inequality.