When financial returns are known: How contingent repayments shape entrepreneurial investment

Dans le cadre des cafés recherche du LIRAES, organisés par Bertrand Chopard, Béatrice Boulu-Reshef, Professeur d’économie à CY Cergy Paris Université, THEMA, viendra présenter un papier intitulé “When financial returns are known: How contingent repayments shape
entrepreneurial investment“, coécrit avec Graciela Kuechle and Bin Wang.

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Available at: https://zenodo.org/records/15622666
This paper examines, both theoretically and experimentally, how return structures—fixed (contingent on success) versus variable—affect investment behavior in entrepreneurial finance. In the fixed-return structure, the rate of return is contractually specified ex ante and conditional on project success or failure; in contrast, variable returns are determined ex post by the entrepreneur after the realization of a risky project’s outcome. The analysis enables us to estimate the cost of potential betrayal in investor–entrepreneur relationships and explores how the presence or absence of a contingent return obligation shapes both investor transfers and entrepreneurial resource allocation. Theoretically, we characterize the predictions of a mean-variance utility framework and highlight its strengths and limitations in explaining behavior. In particular, the model predicts that a wider spread between the return in success and in failure increases investor transfers and encourages greater entrepreneurial engagement. Experimental results support these predictions: both investor transfers and entrepreneur engagement are significantly higher under fixed-return contracts. While investor behavior aligns largely with expected return and risk considerations, entrepreneurial engagement exhibits deviations from purely rational expectations. Engagement increases with the amount received, but under fixed returns it is less sensitive to variations in this amount, suggesting a stabilizing effect of contract structure. Finally, we uncover a robust gender effect: women exhibit systematically higher levels of both transfers and engagement across both return structures.

Keywords: Investment decisions, Return to investment, Behavioral finance, Contingent repayment, Entrepreneurial financing.

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