Working Paper: CEPR ID: DP3263
Authors: Christian Keuschnigg; Soren Bo Nielsen
Abstract: A model of start-up finance with double moral hazard is proposed. Entrepreneurs have ideas but lack their own resources as well as commercial experience. Venture capitalists provide start-up finance and managerial support. Both types of agents thus jointly contribute to the firm's success, but neither type's effort is verifiable. We find that the market equilibrium is biased towards inefficiently low venture capital support. In this situation, the capital gains tax is particularly harmful. The introduction of a small tax impairs managerial advice and leads to first order welfare losses. Once the tax is in place, limitations on loss offset may paradoxically contribute to higher quality of venture capital backed entrepreneurship and welfare.
Keywords: capital gains taxation; double moral hazard; venture capital
JEL Codes: D82; G24; H24; H25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital gains tax (H24) | quality of managerial advice (M54) |
| capital gains tax (H24) | venture capital support (G24) |
| quality of managerial advice (M54) | success rate of startups (M13) |
| capital gains tax (H24) | welfare losses (D69) |
| venture capital support (G24) | success rate of startups (M13) |