A Search Model of Venture Capital, Entrepreneurship, and Unemployment

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A Search Model of Venture Capital, Entrepreneurship, and Unemployment

Author Info

Robin Boadway
Oana Secrieru
Marianne Vigneault

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Abstract

The authors develop a search model of venture capital in which the number of successful matches of entrepreneurs and venture capitalists (VCs) at any moment in time is a function of the number of entrepreneurs searching for funds, the number of VCs searching for entrepreneurs, and the number of vacancies posted by each VC. The authors extend the literature by incorporating search unemployment and they explicitly model the occupational choice of individuals to become workers or entrepreneurs. Their analysis shows that, in the market equilibrium, the level of advice VCs offer is inefficiently low compared with the social optimum. Furthermore, the number of vacancies, the level of employment, and the number of potential entrepreneurs are generally either too low or too high relative to their socially optimal level. Policy to achieve the social optimum consists of a capital gains subsidy, an employment tax or subsidy, and an investment tax or subsidy.

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Paper provided by Bank of Canada in its series Working Papers with number 05-24.

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Length: 32 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:bca:bocawp:05-24

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search

This paper has been announced in the following NEP Reports:

NEP-ALL-2005-09-11 (All new papers)
NEP-BEC-2005-09-11 (Business Economics)
NEP-ENT-2005-09-11 (Entrepreneurship)
NEP-FIN-2005-09-11 (Finance)
NEP-PBE-2005-09-11 (Public Economics)

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