Abstract
Innovative start-ups and venture capitalists are highly clustered: Silicon Valley is probably the best-known example. Clusters differ in the contracts they use, and in how they perform. I explore the link between spillovers, contractual design and performance. I find that more "incomplete" contracts, with fewer contingencies linking entrepreneurs’ rewards to performance benchmarks, become optimal when positive spillovers are large. The contracts enable the innovative entrepreneur and his investor to extract some of the surplus they generate through positive spillovers for new entrants. This provides a new rationale for contractual incompleteness, and may help to explain observed contractual practice in Silicon Valley.
Keywords
innovation; spillovers; venture capital; incomplete contracts;
JEL codes
- D82: Asymmetric and Private Information • Mechanism Design
- D86: Economics of Contract: Theory
- G24: Investment Banking • Venture Capital • Brokerage • Ratings and Ratings Agencies
- L22: Firm Organization and Market Structure
Reference
Roberta Dessi, “Innovation, Spillovers and Venture Capital Contracts”, TSE Working Paper, n. 11-253, December 2011, revised December 2013.
See also
Published in
TSE Working Paper, n. 11-253, December 2011, revised December 2013