Venture Capital Finance-Eliminating Double Sided Moral Hazards through Trade-off between Economic and Behavioural Economic Aspects-A Case Analysis

Venture capital finance has two aspects,the economic aspect and the behavioural economic aspect.The economic aspect includes issues such as conflict of interest between the entrepreneur and the venture capitalist(VC),asymmetric information,moral hazard,and compensation issues for both the parties.The behavioural economic aspect is related to relational factors such as empathy and a feeling of fairness and trust shown by both the parties.Therefore,while deciding the financer,entrepreneur should consider both relational aspect and value add services of the financier and strike optimal trade-off.The ensuing case analysis has been carried out focusing on elimination of double-sided moral hazards through a proper trade-off between economy and behavioural economic theories(aspects).The performance of the venture can be enhanced by balancing both of these theories in practice.An equity distribution that represents economic reward is a source of motivation for both the parties to put optimal efforts towards the success of the venture.This was seen in the case analysis,when the parties perceived the initial equity distribution agreement as fair,the satisfaction level of all the parties increased,leading to the reduction in the possibility of double-sided moral hazard and ensuring the success of the venture.Moreover,the analysis shows that information sharing and two-way communication increases trust and improves decision quality.It further focusses on how feedback and proper work distribution results in efficiency of performance for each of the stakeholders,leading to reduced probability of double-sided moral hazards.

Using behavioural economics to understand tax compliance

‘Behavioural economics’,or the application of methods and evidence from other social sciences to economics,has increased greatly in significance and use in the last two decades.In this paper,we discuss the basic elements of behavioural economics.We then assess the applications of behavioural economics to the analysis of tax compliance.Our central conclusion is that many,perhaps most,of the recent insights on what motivates tax compliance have flowed directly from behavioural economics.We conclude with suggestions on–and predictions of–directions in which future applications should prove useful.

Whistleblowing and tax evasion:Experimental evidence

In a tax compliance experiment we manipulate various dimensions to isolate the effects of whistleblowing:whether incomes are homogeneous or heterogeneous;whether whistleblowing is permitted or not;and whether subjects have complete or incomplete information about others’tax evasion.Under complete information,we find that whistleblowing has a strong impact on compliance,reducing the proportion of concealed income and increasing the precision of the auditing procedure.Moreover,the probability of being whistled increases with evasion and rich subjects react to whistleblowing more than poor subjects do.Introducing incomplete information reduces the deterrent effect of whistleblowing,but not among the richest taxpayers.

Adam Smith and Confucius： A Tour d＇Horizon Towards a Transcultural Foundation of Institutions

Recently, economists have rediscovered the fact of the cultural embeddedness of institutions. This raises the question whether there are transcultural universals of institutions and institutional design. The paper proposes that such universals cannot possibly be empirical givens, but have to be continuously created through transcultural discourse. I take a first step by putting family resemblances in the moral and social philosophy of Adam Smith and the Confucians into the context of the evolution of Western culture and economics. The tour d＇horizon starts with the thesis that the biased perception of Smith（ neglecting the moral philosopher） in economics mirrors its cultural embeddedness into what sociologist Norbert Elias has called the ＂homo clausus＂ construct in Western societies. I continue with a survey of most recent research in behavioural, institutional, and evolutionary economics which clearly prove the fallacies of the ＂homo clausus＂ assumptions of individual autonomy. This explains the recent revival of interest in the ＂Theory of Moral Sentiments＂ on part of economists. Indeed, many Smithian insights can be supported by the recent advances in economic research. One fascinating implication is that opening up a transcultural discourse between Western and Eastern moral philosophy might show the way towards a transcultural foundation of institutions. A number of ＂family resemblances＂ between Smith and Confucius are presented. I conclude by highlighting some contentious issues between China and the West in the global economy, where the transition to a moral economy with Smithian and Confucian foundations might help to find workable solutions.