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Designing an Admission Mechanism for Business Incubators

Sheikh Zeinoddin, Mehdi | 2022

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  1. Type of Document: M.Sc. Thesis
  2. Language: English
  3. Document No: 55223 (44)
  4. University: Sharif University of Technology
  5. Department: Management and Economics
  6. Advisor(s): Fatemi Ardestani, Farshad; Kamali Shahdadi, Behrang
  7. Abstract:
  8. Business incubators admit young startups and help them grow by providing them with a number of services. The startups are put through an admission process, and the incubator is not fully aware of the quality of the startups she is admitting. On the other hand, once inside the incubator, a startup may choose not to exert a high level of effort, as the incubator cannot fully monitor its behaviour. In other words the incubator faces a problem of adverse selection plus moral hazard.Adverse selection and moral hazard between investor and investee (which is not dissimilar to the relationship between incubator and startup) has a vast literature. However, one important difference is that in the literature, the investor is able to receive cash or equity in return for her investment. By contrast, a sizable portion of incubators operate with the goal of economic development. These incubators do not receive cash or equity in return for their services. Thus the solutions presented in the literature are rendered moot because of these extra constraints.In this thesis the adverse selection plus moral hazard problem between incubator and startup is analyzed. Taking the constraints mentioned above into account, a mechanism which can solve these problems is presented for the first time. The mechanism operates as follows: a menu of payments is offered to the startups, with each option taking the following form: a payment is made in the first round, then the startup is judged based upon its output, and may be fired from the incubator. If the startup is allowed to stay, a second-round payment is made. Each option is designed to be optimal for only one type of startup, so that screening is achieved.The model is then further explored using computer simulation. The results reveal that for some combinations of parameters it may be optimal for the incubator to not screen the startups, and instead treat them all as if they were high-type
  9. Keywords:
  10. Mechanism Design ; Moral Hazard ; Adverse Selection ; Contract Design ; Business Incubator ; Start-up Companies

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