The study of the optimal financing contract with unobserved effort of entrepreneurs and investors

There are generally the problems of shortage of funds in enterprises,and venture capital is effective to solve their financing difficulties.Once investors enter into entrepreneurial activities,it needs entrepreneurs and investors to pay some effort to make the project successful.At this time the investor requires the optimal financial contract to induce the entrepreneur to choose high effort to maximize his profit.With hidden effort ex ante,this paper gets two optimization financing contracts by studying a two-period financing model.Further the paper states that the relative size of entrepreneurs' marginal cost of efforts and the expected net present value of investment is the key influencing factor for the choice of financing contracts.When the marginal cost of effort is relatively too high as compared to the expected NPV,then no feasible contracts will exist.But if exerting high effort is relatively less costly as compared to the expected NPV,the optimal financial contract will take two forms,which are(FC1) whose refinancing probabilities of the second stage are both set equal to 1 regardless of the first-period profit and(FC2) with the refinancing probabilities made contingent on the first-period profit.With the existence of double moral hazard,no matter the investor chooses which financing contract,he doesn't need to work together with entrepreneurs in the second stage of the investment.