Technological Determinants of Financial Constraints

This paper studies the investor's investment decision in a standard financial contracting model with contractual constraints. The investor chooses between entrepreneurs with heterogeneous production technologies who generate different probability distributions of cash flow under effort. I provide a complete characterization of optimal financial contracts, agency rents, and the investor's investment decision. Entrepreneurs' production technologies interact with the contractual constraints and lead to heterogeneity in agency rents, which biases and potentially distorts the investor's investment decision. The results generate a complete characterization of entrepreneurs' financial constraints in the presence of heterogeneous production technologies with implications for innovation and technological change