09 December 2018

Inefficient By Design

I am inclined to think that the article's analysis is correct. But, I am also skeptical that any of the leading economic theories on offer could have predicted this phenomena before the fact. 
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.
Merwan H. Engineer, Paul Schure, Dan H. Vo, "Hide and seek search: Why angels hide and entrepreneurs seek" Journal of Economic Behavior & Organization (December 6, 2018).

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