The Study Of Investment Fund In Agricultural Industry As A Contract

It has been an important objective and priority in Chinese modernization that consolidating the foundation of agriculture and realizing the agricultural modernization. Since the 16th National Congress of Communist Party of China, the central has been completing policies to support agriculture, greatly increasing fund for agriculture, deepening the rural reform, all of these promote the transformation from traditional agriculture to modern agriculture, powerfully. However, it is difficult to push forward the agricultural modernization that exists in rural finance system based on indenture. To enhance the level of rural financial service and consolidate the foundation of agricultural development, the central document No.l in 2010 proposed that the government should play a positive role in setting up investment fund in agricultural industry.This paper presents an analytical framework of investment and financing contract in agricultural industry, which based on investors, fund managers and entrepreneurs, and studies the investment fund in agricultural industry. This paper extends Tirole's basic model to highlight the fund management's key role in the process of attracting investment fund and screening project. The paper demonstrate the endogenousness of a fund managers' entrepreneurship by building a learning curve model, then put entrepreneur behavior into financial contract analysis, which shows that entrepreneur behavior can improve information asymmetry, eventually, reduce transaction costs and increase economic efficiency.During the operation of investment fund in agricultural industry, there is double adverse selection and moral hazard exists in financing stage and investment stage. This paper is based on the theory of financial contract, demonstrating the contract structure of investment fund in agricultural industry with game theory and information economics. It shows that fund managers' entrepreneurship is an important signal to avoid adverse selection at financing stage and it can be observed with remuneration contracts. By designing incentive mechanism which uses fund managers' past performance and reputation in the market as indexes moral hazard at this stage can be avoided. In the investment stage, it is believed that the convertible securities and limited partnership are institutional arrangements of investment fund in agricultural industry to avoid adverse selection and moral hazard.To sum up, investment fund in agricultural industry is a new financial contract which supplies equity financing for developing firms during agricultural modernization,it is an agent of capital surplus units, but also a principal of capital deficit units. The investment fund plays a vital role in financing of agricultural entrepreneur's behavior select. Not only can investment fund in agricultural industry reduce the financing cost of agricultural entrepreneur, and prove the probability of peasant entrepreneur's behavior select, but also can provide peasant entrepreneur the human capital to start and manage the business, thereby reducing the cost agricultural enterprise marketization, and promoting the development of agricultural modernization.