Working Paper: CEPR ID: DP4097
Authors: Christian Keuschnigg; Soren Bo Nielsen
Abstract: In recent years, venture capital has increasingly become a factor in the financing of new firms. We examine how the value of mature firms determines the incentives of entrepreneurs to start up new firms and of venture capitalists to finance and advise them. We examine how capital gains taxes as well as subsidies to start-up costs of new firms affect venture capital-backed entrepreneurship. We also argue that dividend and capital gains taxes on mature firms have important consequences for start-up firms as well.
Keywords: double moral hazard; entrepreneurship; taxes; 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 |
|---|---|
| increase in dividend tax on mature firms (H32) | decrease in firm value (G32) |
| decrease in firm value (G32) | impair incentives for entrepreneurial effort and advice (O31) |
| impair incentives for entrepreneurial effort and advice (O31) | decrease in startup entrepreneurship (M13) |
| increase in dividend tax on mature firms (H32) | first-order welfare loss (D69) |
| capital gains tax on young firms (H32) | reduce expected capital gains from starting a firm (L26) |
| reduce expected capital gains from starting a firm (L26) | discourage joint effort between entrepreneurs and VCs (L26) |
| discourage joint effort between entrepreneurs and VCs (L26) | decrease in success probability of startups (M13) |
| capital gains tax relief on mature firms (H32) | enhance venture returns (G11) |
| enhance venture returns (G11) | stimulate entrepreneurial activity (L26) |
| subsidy to startup investment costs (M13) | expand entrepreneurship (L26) |
| subsidy to startup investment costs (M13) | reduce venture returns (G31) |
| reduce venture returns (G31) | impair incentives for effort and advice (H31) |
| impair incentives for effort and advice (H31) | first-order welfare loss (D69) |