Raising Capital from Heterogeneous Investors

Halac, Marina and Kremer, Ilan and Winter, Eyal (2020) Raising Capital from Heterogeneous Investors. The American Economic Review, 110 (3). pp. 889-921. ISSN 0002-8282

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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.

Item Type:
Journal Article
Journal or Publication Title:
The American Economic Review
Additional Information:
Copyright 2020 American Economic Association. All rights reserved
Uncontrolled Keywords:
?? economics and econometrics ??
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Deposited On:
27 Mar 2020 09:15
Last Modified:
22 Jul 2024 23:38