My Future or Our Future? The Disincentive Impact of Income Share Agreements

63 Pages Posted: 25 Oct 2016 Last revised: 25 May 2017

See all articles by Greg Madonia

Greg Madonia

University of Colorado at Boulder - Department of Economics

Austin Smith

Miami University; IZA Institute of Labor Economics

Date Written: April 3, 2017

Abstract

Liquidity constraints can distort efficient investment across a variety of domains, for both firms and individuals. While debt financing is often used to address liquidity constraints, especially at the individual level, there has been a recent push towards Income Share Agreements (ISAs) – equity contracts in which individuals can raise money today by selling shares of their future income. Studying the impact of ISAs on future performance has proven difficult, given the lack of developed markets with sufficient data. Identifying a new ISA marketplace for tournament poker players, we assemble a unique panel data set that tracks performance for individuals who sometimes receive ISA funding and sometimes do not. Beyond providing objective outcome measures, this setting allows for a straightforward comparison of the same individual's performance with and without an ISA contract. Because players seek ISA funding more often for more expensive tournaments, we include flexible individual by tournament entry fee fixed effects to effectively compare the same player to himself in a similar tournament. Consistent with a reduction in effort, we find that return on investment falls substantially when participating in an ISA, with much of the decline coming from a decreased likelihood of finishing in the top 5 percent of participants. Additional tests reveal that about 20 percent of the performance decline can be explained by players selecting into ISAs for tournaments that, even conditional on entry fee, consist of more skilled opponents. The remaining performance decline we attribute to the diminished individual incentives inherent in ISAs.

Keywords: Income Share Agreement, Moral Hazard

JEL Classification: J33, M52, J46

Suggested Citation

Madonia, Greg and Smith, Austin, My Future or Our Future? The Disincentive Impact of Income Share Agreements (April 3, 2017). Available at SSRN: https://ssrn.com/abstract=2858298 or http://dx.doi.org/10.2139/ssrn.2858298

Greg Madonia

University of Colorado at Boulder - Department of Economics ( email )

Economics Building Rm 212 256 UCB
Boulder, CO 80309-0256
United States

Austin Smith (Contact Author)

Miami University ( email )

Oxford, OH 45056
United States

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
101
Abstract Views
524
rank
309,613
PlumX Metrics