A development bank’s choice of private equity partner: a behavioural game-theoretic approach

Abstract

We develop a formal game-theoretic analysis of the economic (value-adding abilities) and behavioural factors (empathy, emotional excitement, passion) affecting a development bank's choice of private-equity partner when investing into emerging market entrepreneurship. Triple-sided moral hazard (TSMH) problems occur in the form of effort-shirking, since the bank, the PE-manager, and the entrepreneur all contribute to value-creation. The bank's investment choices are crucially affected by a) the relative abilities and the potential level of empathy, excitement and passion that may be generated between a PE-manager and an entrepreneur, and b) the personal emotional attachment that the bank develops towards a PE. The severity of TSMH increases inefficiencies in decision-making. Finally, we consider, in addition to political risk mitigation, an additional impact that the bank may have on PE/E value-creation: the bank may have a coaching/mentoring role. Our analysis has implications for academics and practitioners alike.

Game theory in entrepreneurship: a review of the literature

“…Further, the author concludes that policy should focus on the bargaining power of crowdfunders if it aims to promote crowdfunding processes and platforms. Fairchild et al (2019) analyze the factors affecting a development bank's choice of a private equity partner when investing in entrepreneurship in emerging markets. The authors present a game-theoretic analysis of how the development bank's decisions are affected by economic factors and behavioral characteristics (such as passion and excitement) of private equity firms and JBSED 4,1 entrepreneurs, in addition to the bank's own emotional biases.…”

“…Further, the author concludes that policy should focus on the bargaining power of crowdfunders if it aims to promote crowdfunding processes and platforms. Fairchild et al . (2019) analyze the factors affecting a development bank's choice of a private equity partner when investing in entrepreneurship in emerging markets.…”

Corporate Dividend Policy, Managerial Overconfidence, Myopia, and Investor Irrationality: A Complex Concoction

“…The analyses in our models in this paper consider these conflicts, and attempt to develop theoretical explanations for the mixed evidence. 1 In this (first) benchmark model, we provide a simple analysis which demonstrates when and why managerial overconfidence may result in lower dividends. In the following section, we then introduce our much more complex analysis, incorporating moral hazard (in the form of effort-shirking), overconfidence, and myopia, to demonstrate how overconfidence can lead to higher dividends.…”

“…Pikulina, Renneboog, and Tobler (2014) reveal that people who overestimate their ability to be higher than it actually is exert more effort. In this study, the term overconfidence stems from the 'better-than-the-average' effects, and is defined as an overestimation of individual ability relative to the average ability level in the economy (Fast et al 2012;Van den Steen 2011). Specifically, an overconfident manager is defined as the one who overestimates their ability to influence the success of current/future projects.…”

“…In this case of the low dividend, the manager can take project 2 regardless of project 1 realisation, so he has no incentive to exert any effort. As his myopia parameter reduces in the [1,0] interval, his effort level increases as he places more weight on the realised value at date 2.…”