STEPHEN DOSSOU

Abstract

This paper presents a model of informational monopoly in venture capital. In the model, the informational monopolist, namely the leader agency, encounters deals about which he knows the exact probabilities of success. The leader proposes a mechanism to external investors to invest on each project and share the benefits, with the possibility of credibly communicating on the nature of the projects. We show that the optimal mechanism is socially optimal. Indeed, it is in the best interest of the leader agency to hide private information as long as possible. Without loss of generality, uniform contracts are optimal. Investors cannot force the leader to reveal private information before engaging in the deal. Such a design would not be socially optimal, despite it being more advantageous to outside investors.