Christian Lukas

A Signaling Perspective on Partner Selection in Venture Capital Syndicates

This paper analyzes the factors impacting partnering decisions in venture capital syndicates using a unique data set of 2,373 venture capitalist (VC) transactions in Germany. We employ a signaling perspective to partner–selection strategies within VC syndicates. By including time–varying information about industry experience and cooperation patterns, we explicitly take into account not only the changing social context for partner selection, but also the dynamic nature of signals sent and received. Our analysis documents that the informativeness of investment experience as a signal depends on the existence and frequency of previous joint deals with the lead VC. Experience becomes a much stronger signal if previous invitations to syndicates are bilateral rather than unilateral. The willingness to invite others to deals signals the ability to reciprocate through ones own deal flow. Moreover, we show how the value of signals erodes over time, that is, information from the previous year carries more informational value than signals from more distant years. In sum, the data reveal that different signals carry weight for lead VCs, and that the frequency of signals sent and the stage of development of the portfolio firm positively moderate the value and relevance of signaling behavior. While early stage investments are mainly characterized by need to diversify and to spread risks, value–added advice is necessary in later rounds, and hence, the strength of the signals sent and received gain in relevance and in value.

The Monotonicity Puzzle: An Experimental Investigation of Incentive Structures

Non-monotone incentive structures, which — according to theory — are able to induce optimal behavior, are often regarded as empirically less relevant for labor relationships. We compare the performance of a theoretically optimal non-monotone contract with a monotone one under controlled laboratory conditions. Implementing some features relevant to real-world employment relationships, our paper demonstrates that, in fact, the frequency of income-maximizing decisions made by agents is higher under the monotone contract. Although this observed behavior does not change the superiority of the non-monotone contract for principals, they do not choose this contract type in a significant way. This is what we call the monotonicity puzzle. Detailed investigations of decisions provide a clue for solving the puzzle and a possible explanation for the popularity of monotone contracts.

Optimal Design of Incentive Contracts: Behavioural and Multi-Period Performance Measurement Aspects

In this chapter I summarize and elaborate on some of the findings from the analytical literature on incentive contract design. After a short introduction to the standard agency model, behavioural extensions of the model are discussed. Both the analysis of loss aversion and identity utility can offer explanations for the popularity of bonus contracts or low-powered incentive schemes. Incentive contracts usually span multiple periods. For this reason the multi-period extension of the standard model is presented with focus on the frequency of performance evaluations. Depending on the specific long-term effect of effort, a high informativeness or low informativeness of performance signals leads to optimality of infrequent performance evaluations. The solution concept to incentive contract design problems is subgame-perfection. I present thoughts about possible problems associated with that concept and about available alternatives with an eye on incentive contract design.

Trust Me, it is High Trust: A Note on Trust Measurement

This paper explores whether an exchange featuring (almost) equal expected gains and expected losses for a trusting individual is evidence for high trust or low trust; I argue that such an exchange shows low trust. A simple trust measure is suggested which could be applied both in experimental and analytical research.

Managerial Skill Acquisition and Optimality of a Simple Bonus Rule

The benefit of non-information rationing aggregate performance evaluation is studied in a limited commitment setting. Depending on the prior distribution of the managerial skill parameter, an equal bonus rule, that is intertemporal aggregation of performance measures, can be efficient as it commits the principal to a more evenly spread allocation of incentives. The result lends support to the widespread use of linear bonus rules and piece rates for performance contingent compensation.

Get More for Less? An Experimental Study of a Non-Monotone Pay Scheme

In this paper we test a dynamic agency model. The incentive compatible contract is non-monotone and does not award the highest pay to the most successful agent. Based on the assumption that agents are rational we expect them to choose high effort despite the non-monotonicity of the contract. Three treatments with differing information structures are analyzed. Overall, the experiments confirm the model and show that the non-monotone contract has the desired incentive effects. Furthermore, principals strictly prefer the non-monotone contract over a monotone contract that would ex ante lead to a lower expected surplus for them. Observed learning behavior of agents accords with learning direction theory. Possible extensions of the experiments to analyze the impact of fairness and reciprocity in detail are discussed.