Venture Capital and Private Equity Contracting

Chapter 16. Contracts and Effort

16.1. Introduction and Learning Objectives

A common theme across the literature in economics, finance, law, and management is the role of formal mechanisms (e.g., actual contracts that specify ownership and control, and the law that governs the enforcement of such contracts) versus informal mechanisms (e.g., trust, reputation, and management structures) in governing relationships. Contracts are by definition incomplete, as not all eventualities can be anticipated at the time of writing a contract (see, e.g., Hart and Moore, 1999). We may therefore expect informal governance mechanisms to play a strong role in relationships that are formed by contract. For example, Kanniainen and Keuschnigg (2003, 2004) and Keuschnigg ...