FOCUS: Risks in Business Ethics and Venture Capital

By creating new ventures and new job opportunities venture capital is essential to a dynamic economy. But it should also be fair and ethical at every stage. Professor Fassin explores the various ethical issues which arise between venture capitalists, entrepreneurs and investors. He teaches at the University of Mons (FUCAM) and has written widely on management. From 1988-1991 he was Secretary General of the European Venture Capital Association. He is partner of the Veerick School of Management of the University of Ghent.     

Budget-constrained Pareto-efficient allocations

This paper is concerned with a study of budget-constrained Pareto-efficient (BCPE) allocations, i.e., allocations which given a price system satisfy a given income distribution. We prove existence, show structural stability, and establish a sufficient condition for uniqueness of BCPE allocations. These properties of the BCPE allocations are deduced from similar properties of Walrasian equilibria by a duality theory which is of independent interest.     

SOCIAL NETWORKS AND CRIME DECISIONS: THE ROLE OF SOCIAL STRUCTURE IN FACILITATING DELINQUENT BEHAVIOR*

Delinquents compete with each other in criminal activities but benefit from being friends with other criminals by learning and acquiring proper know‐how on the crime business. We study the subgame‐perfect Nash equilibrium of this game in which individuals decide first to work or to become a criminal and then the crime effort provided if criminals. We show that multiple equilibria with different numbers of active criminals and levels of involvement in crime activities may coexist and are only driven by the geometry of the pattern of links connecting criminals.     

The evolution of cooperation in strategic alliances: Initial conditions or learning processes?

We examine how the learning, along several dimensions (environment, task, process, skills, goals), that takes place in strategic alliances between firms mediates between the initial conditions and the outcomes of these alliances. Through a longitudinal case study of two projects in one alliance, replicated and extended in another four projects in two alliances, a framework was developed to analyze the evolution of cooperation in strategic alliances. Successful alliance projects were highly evolutionary and went through a sequence of interactive cycles of learning, reevaluation and readjustment. Failing projects, conversely, were highly inertial, with little learning, or divergent learning between cognitive understanding and behavioral adjustment, or frustrated expectations. Although strategic alliances may be a special case of organizational learning, we believe analyzing the evolution of strategic alliances helps transcend too simple depictions of inertia and adaptation, in particular by suggesting that initial conditions may lead to a stable ‘imprinting’ of fixed processes that make alliances highly inertial or to generative and evolutionary processes that make them highly adaptive, depending on how they are set.     

Out-of-equilibrium price dynamics

A trading-post organization of exchange is shown to determine an out-of-equilibrium price dynamics. The unique equilibrium of quasi-linear economies (defined by log-linear utility functions) is stable for the discrete time version of the dynamics. Equilibria that are stable for the continuous time version include those that satisfy the gross-substitutability property, the no-trade equilibria and, more generally, those for which trade intensity is relatively small. In addition, the set of stable equilibria is path-connected when endowments are allowed to vary without sign restrictions.      

Intergenerational risksharing and equilibrium asset prices

In the presence of overlapping generations, a social security system, with contingent taxes and benefits, can affect both asset prices and intergenerational risksharing. In a simple model with two risky factors of production—human capital, owned by the young, and physical capital, owned by all older generations—a social security system that optimally shares risks exposes future generations to a share of the risk in physical capital. Such a system reduces precautionary saving and increases the riskbearing capacity of the economy. Under plausible conditions it increases the riskless interest rate, and lowers the price and risk premium of physical capital.     

Creating new growth platforms

Sooner or later, most companies can't attain the growth rates expected by their boards and CEOs and demanded by investors. To some extent, such businesses are victims of their own successes. Many were able to sustain high growth rates for a long time because they were in high-growth industries. But once those industries slowed down, the businesses could no longer deliver the performance that investors had come to take for granted. Often, companies have resorted to acquisition, though this strategy has a discouraging track record. Over time, 65% of acquisitions destroy more value than they create. So where does real growth come from? For the past 12 years, the authors have been researching and advising companies on this issue. With the support of researchers at Harvard Business School and Insead, they instituted a project titled "The CEO Agenda and Growth". They identified and approached 24 companies that had achieved significant organic growth and interviewed their CEOs, chief strategists, heads of R&D, CFOs, and top-line managers. They asked, "Where does your growth come from?" and found a consistent pattern in the answers. All the businesses grew by creating new growth platforms (NGPs) on which they could build families of products and services and extend their capabilities into multiple new domains. Identifying NGP opportunities calls for executives to challenge conventional wisdom. In all the companies studied, top management believed that NGP innovation differed significantly from traditional product or service innovation. They had independent, senior-level units with a standing responsibility to create NGPs, and their CEOs spent as much as 50% of their time working with these units. The payoff has been spectacular and lasting. For example, from 1985 to 2004, the medical devices company Medtronic grew revenues at 18% per year, earnings at 20%, and market capitalization at 30%.