TY - UNPB

T1 - Raising Capital from Heterogeneous Investors

AU - Halac, Marina

AU - Kremer, Ilan

AU - Winter, Eyal

PY - 2018/9

Y1 - 2018/9

N2 - A rm raises capital from multiple investors to fund a project. The project succeedsonly 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.

AB - A rm raises capital from multiple investors to fund a project. The project succeedsonly 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.

KW - mechanism design

KW - contracting with externalities

KW - collective action problem

KW - strategic complementarities

KW - unique implementation

M3 - Working paper

T3 - Economics Working Papers Series

BT - Raising Capital from Heterogeneous Investors

PB - Lancaster University, Department of Economics

CY - Lancaster

ER -