Information and Control in Ventures and Alliances



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    • Dessein is at the Graduate School of Business, University of Chicago. I benefited from discussions with Mathias Dewatripont, Luis Garicano, Thomas Hellman, Steve Kaplan, Josh Lerner, Michael Raith, Patrick Rey, Per Stromberg, and Jean Tirole; comments from participants at the ESSET conference in Gerzensee, the 2003 Venture Capital and Entrepreneurial Finance conference in Stockholm, and seminar audiences in Brussels, USC, Chicago GSB, Northwestern Kellog, and the University of Washington; and very useful suggestions from an anonymous referee.


This paper develops a theory of control as a signal of congruence of objectives, and applies it to financial contracting between an investor and a privately informed entrepreneur. We show that formal investor control is (i) increasing in the information asymmetries ex ante, (ii) increasing in the uncertainty surrounding the venture ex post, (iii) decreasing in the entrepreneur's resources, and (iv) increasing in the entrepreneur's incentive conflict. In contrast, real investor control—that is, actual investor interference—is decreasing in information asymmetries. Control rights are further such that control shifts to the investor in bad states of nature.