Question

Explain how the use of venture capital can solve the problem of moral hazard?

Please text not screenshot.

Answer 1

Moral hazard is a problem which arises between the investor and management of the company. As investor has invested money in the business but the decision to spend money lies in the hands of management of company, there is a risk that management may utilise it poorly or divert it to less productive uses.

Therefore to bridge this gap between investors and management of company venture capital plays an important role in keeping a vigilance over where the funds are utilised.

They can adopt the below practice to keep this hazard at its minimum.

1. Monitoring - Funds utilisation needs to be monitored on frequent basis so as to understand where these are utilised and are utilised in efficiently.

2. Job rotation - This practice can be used so as to seek that no one will come in such a position where they will be able to defraud investors.

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