A development bank's choice of private equity partner: a behavioural game-theoretic approach. Issue 16 (2nd November 2019)

• Record Type: Journal Article
• Authors: Fairchild, Richard; Crawford, Ian; El-Fakir, Adil
• Is Part Of: European journal of finance. Volume 25:Issue 16(2019)
• Page Start: 1510
• Page End: 1526
• Publication Date: 2019-11-02
• Subjects: Development bank -- private equity -- triple-sided moral hazard -- passion -- behavioural game-theory; Finance -- Periodicals; Finance -- Europe -- Periodicals; International finance -- Periodicals; 332.094
• DOI: 10.1080/1351847X.2019.1647863
• Languages: English
• ISSNs: 1351-847X

Abstract

ABSTRACT: We develop a formal game-theoretic analysis of the economic (value-adding abilities) and behavioural factors (empathy, emotional excitement, passion) affecting a development bank's choice of private-equity partner when investing into emerging market entrepreneurship. Triple-sided moral hazard (TSMH) problems occur in the form of effort-shirking, since the bank, the PE-manager, and the entrepreneur all contribute to value-creation. The bank's investment choices are crucially affected by a) the relative abilities and the potential level of empathy, excitement and passion that may be generated between a PE-manager and an entrepreneur, and b) the personal emotional attachment that the bank develops towards a PE. The severity of TSMH increases inefficiencies in decision-making. Finally, we consider, in addition to political risk mitigation, an additional impact that the bank may have on PE/E value-creation: the bank may have a coaching/mentoring role. Our analysis has implications for academics and practitioners alike.