Working Paper: CEPR ID: DP1887
Authors: Christian Keuschnigg
Abstract: Venture capitalists provide risk capital and valuable monitoring services that are essential for the success of upstart companies. The financial sector?s expertise in monitoring investment proposals may increase with the accumulated experience in funding such projects. In the other direction, the productivity gains from learning lower the cost of venture capital finance and reinforce start-up investment. Since learning depends on aggregate investment, the effect is external to individual agents. The paper demonstrates how the nature of the externality depends on the state of financial sector development, and how the appropriate tax/subsidy policy should be tailored to it.
Keywords: upstart investment; financial sector development; externalities; corrective subsidies
JEL Codes: G20; G24; H23; H25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Venture Capital (G24) | Entrepreneurial Success (M13) |
| Financial Sector Development (O16) | Monitoring Expertise of Venture Capitalists (G24) |
| Monitoring Expertise of Venture Capitalists (G24) | Cost of Venture Capital (G24) |
| Cost of Venture Capital (G24) | Startup Investment (L26) |
| Venture Capital (G24) | Financial Sector Efficiency (G29) |
| Financial Sector Efficiency (G29) | Venture Capital Investment (G24) |
| Venture Capital Investment (G24) | Financial Sector Efficiency (G29) |