UC Berkeley

In chapter 1, I study a dynamic innovation race, in which firms invest to be the first toattain a breakthrough invention. I examine how delays in monitoring firms' investments affect their ability to achieve a coordinated under-investment equilibrium enforced by the threat of elevated investment by rival firms. When monitoring delays are small, equilibrium investment can be considerably delayed, matching the first-best solution under cooperation. Even with significant delays in monitoring, equilibrium investment is below, and firm values are well above, the no-monitoring competitive outcome. As a result, the regulatory goal of transparency can conflict with the goal of encouraging investment in innovation. In addition I study how changing the number of firms in the race can affect the outcome. As the number of firms increases, the incentive to preempt escalates, and coordinated effort boundaries decline, as does the maximum delay time in which the first best can be achieved with coordination.

In chapter 2, I study the contracting problem between investors (limited partners or LPs) and venture capitalists ( general partners or GPs) . In real world, GPs are sometimes paid on a deal-by-deal basis and other times on a whole-portfolio basis. When is one method of payment better than the other? I develop a model to see how the method of compensation's payment can affect the behavior of general partners (GP) in a limited partnership agreement (LPA). I show that when assets (projects or firms) are highly correlated or when GPs have low reputation, whole-portfolio contracting is superior to deal-by-deal contracting. In this case, by bundling payouts together, whole- portfolio contracting enhances incentives for GPs to exert effort. Therefore, it is better suited to alleviate the moral hazard problem which is stronger than the adverse selection problem in the case of high correlation of assets or low reputation of GPs. In contrast, for low correlation of assets or high reputation of GPs, information asymmetry concerns dominate and deal-by-deal contracts become optimal, as they can efficiently weed out bad projects one by one. These results shed light on recent empirical findings on the relationship between investors and venture capitalists.