Investment and operational decisions for start-up companies: a game theory and Markov decision process approach

This paper analyses the contract between an entrepreneur and an investor, using a non-zero sum game in which the entrepreneur is interested in company survival and the investor in maximizing expected net present value. Theoretical results are given and the model’s usefulness is exemplified using sim...

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Bibliographic Details
Published in:Annals of operations research Vol. 299; no. 1-2; pp. 317 - 330
Main Authors: Archibald, Thomas W., Possani, Edgar
Format: Journal Article
Language:English
Published: New York Springer US 01.04.2021
Springer
Springer Nature B.V
Subjects:
Business and Management
Combinatorics
Decision analysis
Decision theory
Entrepreneurship
Game theory
Investments
Management
Markov processes
New business enterprises
Operations research
Operations Research/Decision Theory
S.I.: Recent Developments in Financial Modeling and Risk Management
Startups
Theory of Computation
Zero sum games
United Kingdom
Markov decision process
Contract design
Risk analysis
Finance
Start-up finance
ISSN:0254-5330, 1572-9338
Online Access:Get full text
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Summary:This paper analyses the contract between an entrepreneur and an investor, using a non-zero sum game in which the entrepreneur is interested in company survival and the investor in maximizing expected net present value. Theoretical results are given and the model’s usefulness is exemplified using simulations. We have observed that both the entrepreneur and the investor are better off under a contract which involves repayments and a share of the start-up company. We also have observed that the entrepreneur will choose riskier actions as the repayments become harder to meet up to a level where the company is no longer able to survive.
Bibliography:ObjectType-Article-1
SourceType-Scholarly Journals-1
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ISSN:0254-5330
1572-9338
DOI:10.1007/s10479-019-03426-5