Working Paper: CEPR ID: DP3850
Authors: Christian Keuschnigg
Abstract: This Paper discusses the role of public policy towards the venture capital industry. The model emphasises four margins: supply of entrepreneurs due to career choice, entry of venture capital funds and search for investment opportunities, simultaneous entrepreneurial effort and managerial advice subject to double moral hazard, and mark-up pricing when the successful firm introduces a new good. The Paper derives an optimal policy that succeeds to implement a first best allocation in decentralized equilibrium. It also considers short- and long-run comparative static and welfare effects of piecemeal reform with regard to the capital gains tax, innovation subsidy, public R&D spending and other policy initiatives.
Keywords: double moral hazard; innovation; public policy; venture capital
JEL Codes: D82; G24; H21; H25; H32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal public policy (H21) | first-best allocation (D61) |
| government spending on basic research (H56) | probability of entrepreneurial success (L26) |
| public R&D funding (O32) | higher rates of startup formation and success (L26) |
| revenue subsidies to entrepreneurs and VCs (H25) | eliminate inefficiencies caused by double moral hazard (D61) |
| revenue subsidies to entrepreneurs and VCs (H25) | increase joint efforts and enhance overall success rates of startups (O36) |
| capital gains tax policies (F38) | influence likelihood of entering VC backed startup ecosystem (L26) |