Merwan H. Engineer, Paul Schure, Dan H. Vo, Hide and seek search: Why angels hide and entrepreneurs seek, Journal of Economic Behavior & Organization, Available online 6 December 2018, https://doi.org/10.1016/j.jebo.2018.10.007.
Highlights
- Traditional search theory assumes search frictions are part of the technology; search frictions are imposed by the environment.
- We introduce the idea that search frictions may be the consequence of a deliberate choice.
- Our leading example is the angel capital market, a large market for arms-length entrepreneurial finance.
- In our model entrepreneurs engage in costly search for financiers as these financiers choose to make themselves hard to find.
- Entrepreneurs signal (high) productivity by engaging in costly search for financiers.
Abstract
The angel capital market poses a puzzle for search theory. Angel investors (“angels”) are often described in the literature as if they were hiding from entrepreneurs that seek angel capital investment. Such behavior by angels forces entrepreneurs to engage in costly search for angels. In our model, a separating equilibrium exists in which hiding by angels discourages search by low-productivity entrepreneurs who would inundate any visible angels. Only high-productivity entrepreneurs incur the time and effort costs of search to signal their type and avoid the lemons problem in the visible capital market. As the search market generates higher quality, hence more profitable matches, social surplus may increase despite the costs of hiding and searching. Hide and seek search contrasts with standard search theory where agents choose strategies to mitigate inherent physical and informational search frictions.
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