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Trust in a Network of Investors and Startup Entrepreneurs

In: Artificial Economics and Self Organization

Author

Listed:
  • Michael Roos

    (Ruhr University Bochum)

  • Anna Klabunde

    (Ruhr University Bochum)

Abstract

We propose a simulation model of a stylized angel investor market in which the business relations are conditioned on the trust of the angel into the startup entrepreneur. Initial trust depends on social proximity between the angel and the entrepreneur and is later on updated depending on the returns an investor receives from an entrepreneur. We show that investors benefit most in terms of returns from an intermediate sensitivity of trust to returns. From an investor’s perspective, too much trust keeps too many unproductive firms in the market, while too little trust leads to the termination of profitable relations because of minor productivity drops. The proportion of entrepreneurs who reach the objective of leaving the market with enough capital, however, is higher if investors lose trust quickly and stop funding early. In this sense there is a conflict of interest between investors and entrepreneurs.

Suggested Citation

  • Michael Roos & Anna Klabunde, 2014. "Trust in a Network of Investors and Startup Entrepreneurs," Lecture Notes in Economics and Mathematical Systems, in: Stephan Leitner & Friederike Wall (ed.), Artificial Economics and Self Organization, edition 127, pages 147-159, Springer.
    • Handle: RePEc:spr:lnechp:978-3-319-00912-4_12
    DOI: 10.1007/978-3-319-00912-4_12
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