An IT professional’s dilemma: be an entrepreneur or a consultant?
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Using a simple model, this paper examines the behavior of an IT professional who faces the choice between becoming an entrepreneur or an employee. To our knowledge, this is the first formal study of the dilemma facing an IT professional. IT professionals are somewhat unique in that they embody enough labor input/intellectual property that even a single professional can deliver a viable product/service. An incentive contract is auctioned to attract the highest bid in return for partial ownership from venture capitalists. Failure to raise venture finance results in the professional seeking employment. Both venture finance and employment are uncertain. The comparative-static effects of changes in project size and VC competition are determined. We find that under certain conditions a larger project is associated with a cost-plus contract, while greater VC competition results in a fixed-price contract being offered. The agent’s effort is lower in a larger project, but non-negative under greater VC competition.
Keywordsventure capital information technology incentive contracts
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