A two-sided matching model of monitored finance

We analyse a model of two-sided matching and incentive contracts where expertinvestors (venture capitalists) with different monitoring capacities are matched withfirms with different levels of initial wealth. Firms do not have sufficient start-upcapital to cover their project costs and hence, seek external financing. In equilibrium,the matching and the payoffs of the venture capitalists and the firms are determinedsimultaneously. More effective VCs and higher-wealth firms consume higher payoffs.We also show that, in equilibrium VCs with higher monitoring ability invest in firmswith lower initial wealth following a negatively assortative matching pattern.....