A Two-Sided Matching Model of Monitored Finance

CORE Discussion Paper No. 2007/5

21 Pages Posted: 22 Mar 2007

See all articles by Kaniska Dam

Kaniska Dam

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE)

Date Written: January 2007

Abstract

We analyse a model of two-sided matching and incentive contracts where expert investors (venture capitalists) with different monitoring capacities are matched with firms with different levels of initial wealth. Firms do not have sufficient start-up capital to cover their project costs and hence, seek external financing. In equilibrium, the matching and the payoffs of the venture capitalists and the firms are determined simultaneously. More effective VCs and higher-wealth firms consume higher payoffs. We also show that, in equilibrium VCs with higher monitoring ability invest in firms with lower initial wealth following a negatively assortative matching pattern.

Keywords: Venture capital, Assortative matching, Incentive contracts

JEL Classification: C78, D82, E44, G24

Suggested Citation

Dam, Kaniska, A Two-Sided Matching Model of Monitored Finance (January 2007). CORE Discussion Paper No. 2007/5, Available at SSRN: https://ssrn.com/abstract=975075 or http://dx.doi.org/10.2139/ssrn.975075

Kaniska Dam (Contact Author)

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium

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