Emerging Firms And The Allocation Of Control Rights: A Bayesian Approach

Abstract

This paper suggests that founders often use firm formation to exploit opportunities and must sometimes make organizing decisions about the allocation of control before the economic value of the opportunity can reliably be known even probabilistically. Motivated by questions surroundings such settings, we use incomplete contract theory and apply a Bayesian learning model to the allocation process of ownership control rights of founders in emerging firms. This model examines how founders learn and build on their prior beliefs, enabling them to allocate and change ownership control rights under differing conditions of risk and uncertainty.