Study On Contract Design Of Venture Capital About Double Moral Hazard

It is a present focus of economic study on some problem, such as principal-agent, moral hazard, contracts arrangement and so on. Traditional study almost all focus on the moral hazard of single agent and its'incentive to the single agent. The viewpoint of this study is that moral hazard comes from information asymmetry, and the principal has no method to observe or to verify the behavior of the agent, then the agent chooses efforts level of the maximization of the personal utilization, which lead to not get the best effort lever the principal wish. That is to say, there is a profit conflict between the object of principal and agent. The performance of agent will deviate the target of principal. In the practical process, information imperfectness and information asymmetry are not the patent of the principal. The agent also may be on the inferior position for information. Principal also have the motivation of opportunism, and it also will lead to the moral hazard. Actually, all of the principals and agents will have the superiority and inferiority on the information. Both sides can not be in control of all information. And the diversification of the information also increases the opportunity. Therefore the rational choice of both sides is gamble and departs from the Pareto Optimum, and the moral hazard of both sides (double moral hazard) is unavoidable. So as the important tools for avoid the moral hazard, contract arrangement is the most popular study.In the process of venture capital, whether to get success or not for venture enterprise, it depends on the both efforts between venture capitalist and venture enterprises. As the initiator, the enterpriser must input his effort to open out product and market, and make sure the products rivalrous and have good foreground. But venture capitalist is also the participant and has corresponding benefit. Therefore, the enterpriser dose not have the complete residual claims, which make it possible for venture capitalist to reduce his effort and form moral hazard. In addition, besides to offer capital, venture capitalist must give his supervise, consultation and other help. And this work needs more effort from venture capitalist. Similarly, owning to the participation of venture enterprises, the venture capitalist also dose not have the complete residual claims, and lead to the moral hazard from the enterpriser. The asymmetry of effort and the arrangement of the residual claims make venture capitalist and venture enterpriser have the motivation for seeking private benefit, which lead to the formation of double moral hazard.Present study on double moral hazard mostly concentrates on micro corporation system that enterprise run. From the angle of contract, there is some scattered research on moral hazard of some aspects. But there is almost not research on the basic reason and formative mechanism of the double moral hazard, which leads to get the essential method to solve the double moral hazard. Based on the study to seek private benefits of both sides, the paper starts from the angle of the system and contract, which is very important to promote the development of venture capital from prime method. Based on this, by summarizing the research and correlative theory of predecessor firstly, this paper spreads the contents about the formation mechanism of the double moral hazard and the corresponding arrangement of contract.Based on the conclusion to the prophase research and corresponding theory, this paper gave a detailed description concluding two parts and four aspects. The first part mains to describe two aspects, (1)forming the moral hazard in the equity contract and convertible security contract, and the corresponding method to consummate contract combining contingent control; (2) to remedy the short of contract arrangement, analyzing the new moral hazard from control rights and the corresponding contract design.The second part mains to describe the other two aspects,(1) analyzing the new moral hazard under Syndication contract and the corresponding contract design; (2) analyzing how to create competition by Portfolio contract to reduce the moral hazard.The basic construction and main content is arranged as follows:Chapter 1: Introduction.This chapter mainly explained the research background, the meaning of research, review of the literature, the structure of the dissertation and the main innovation.Chapter 2: The theoretical foundation about Study on double moral hazard of venture capital contracts.This chapter is the theoretical foundation for the posterior research. It summarized and conducted contract theory, and put forward the incomplete contract theory as research frame. It connected research progress of the contract theory and double moral hazard on venture capital, and summarized the researching thought on double moral hazard of venture capital based on the incomplete contract theory.Chapter 3: Research on the different kinds of contract arrangement the double moral hazard based on the double moral hazard of venture capital.This chapter main aimed at two kind of contract arrangement between venture capitalist and venture entrepreneur, and studied on the moral hazard and mechanism of avoiding the moral hazard in the equity contract and convertible security contract. Furthermore it indicated that arranging the contract combined with the contingent control will reduce the moral hazard: lacking the effort of both side.Chapter 4: Research on double moral hazard of venture capital contracts under control rights.When endue with the control right to one part, this part will become more strong on the negotiation ability and own corresponding threaten ability. From this angle, this chapter analyzed the new moral hazard coming from the allocation of control right, and to made contracts arrangement to avoid the moral hazard under different allocation mode about control right.Chapter 5: Research on double moral hazard of venture capital under Syndication contract.This chapter focused on a special contract mechanism: Syndication contract and analyzed the corresponding moral hazard under Syndication contract. Furthermore, it concentrated on the forming mechanism about the moral hazard of"theft"owning to Syndication contract, and the corresponding contract arrangement to avoid"theft".Chapter 6: Research on double moral hazard of venture capital under Portfolio contract. This chapter focused on another special contract mechanism: Portfolio contract and analyzed the corresponding moral hazard under Portfolio contract. Furthermore, it concentrated on how to use constrained capital to create competition and to reduce the moral hazardChapter 7: Summarizing and expectation.This chapter summarized and reviewed the whole paper, and pointed out the deficiency, gave some prospect about double moral hazard in the future.This paper's innovation is shown as follow:Firstly, it effectively combined the contingent control and contract arrangement.In the prophase, most of the research on moral hazard analyzed the contract tools, such as debt, equity, and convertible security, and how to promote both side imputing more effort, to compare all kind of contract tools in order to prove that convertible security or equity are better contract arrangement for avoiding the moral hazard. This paper breaks through the thought inertia about just using the arrangement of contract to avoid or solve the double moral hazard. The new opinion is the arrangement of contract could not avoid the moral hazard completely, and it is necessary that the arrangement of contract should combine with contingent control to promote the incentive to efforts and avoid the moral hazard of seeking private benefit.Considering that the private benefit of the enterpriser coming from the control right can not be ignore, this paper introduced the effort lever and the private benefit of the enterpriser to the revenue function, and private benefit was regarded as a continuous endogenetic variable. Under this thought, this paper analyzed respectively the formation mechanism of the moral hazard under equity contract arrangement and convertible security contract arrangement, next improved arrangement of these two contracts by combine with the contingent control.Secondly, it analyzed the new moral hazard from control right, and study the mechanism of avoid the new moral hazard.Most research on the control right used to study the mechanism of avoiding moral hazard by the thought of contingent control. From the angle of control right's attribute and characteristics, this paper analyzed the new moral hazard about the choice that both sides takes no effective action owing to the namely control right, and constructed corresponding mechanism by designing re-negotiation contract to avoid moral hazard.`Thirdly, it analyzed the double moral hazard in the two kinds of special contract mechanism from the view of multiple principals and multiple agents.It is popular to study on double moral hazard of the single venture capitalist or single venture enterpriser. This paper brook through the traditional thoughts, conceived the contract arrangement from the thought of multiple principals and multiple agents, and studied the two kinds of special contract mechanism. In Syndication contract, it did not just consider the effort lever of the enterpriser, but also consider both effort lever from double moral hazard. It researched the formatting mechanism, and designed the contract arrangement by the equilibrium size of Syndication. In Portfolio contract, it studied how to design the limited capital to incentive both effort and create the competitive effect, which is a completely different visual angle.