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Start-ups, Venture Capitalits, and the Capital Gains Tax

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Author Info
Christian Keuschnigg ()
Soren Bo Nielsen ()

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Abstract

A model of start-up finance with double moral hazard is proposed. Entrepreneurs have ideas but lack 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 off-set may paradoxically contribute to higher quality of venture capital backed entrepreneurship and welfare.

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Publisher Info
Paper provided by CESifo GmbH in its series CESifo Working Paper Series with number CESifo Working Paper No. 742.

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Date of creation: 2002
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Handle: RePEc:ces:ceswps:_742

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Related research
Keywords: venture capital capital gains taxation double moral hazard.

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Find related papers by JEL classification:
G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. McAfee, R Preston & McMillan, John, 1991. "Optimal Contracts for Teams," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 561-77, August. [Downloadable!] (restricted)
  2. Kanniainen, V. & Keuschnigg, C., 2001. "Start-up Investment With Scarce Venture Capital Support," University of Helsinki, Department of Economics 503, Department of Economics.
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  3. Kaplan, Steven & Strömberg, Per Johan, 2000. "Financial Contracting Theory Meets The Real World: An Empirical Analysis Of Venture Capital Contracts," CEPR Discussion Papers 2421, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. Paul Gompers & Josh Lerner, 2001. "The Venture Capital Revolution," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 145-168, Spring. [Downloadable!] (restricted)
  5. Christian Keuschnigg & Soren Bo Nielsen, 2001. "Public Policy for Venture Capital," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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  6. Kanniainen, Vesa & Keuschnigg, Christian, 2003. "The optimal portfolio of start-up firms in venture capital finance," Journal of Corporate Finance, Elsevier, vol. 9(5), pages 521-534, November. [Downloadable!] (restricted)
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  7. Roger Gordon, 1998. "Can High Personal Tax Rates Encourage Entrepreneurial Activity?," IMF Staff Papers, Palgrave Macmillan Journals, vol. 45(1), pages 2. [Downloadable!] (restricted)
  8. Christian Keuschnigg & Søren Bo Nielsen, 2004. "Progressive Taxation, Moral Hazard, and Entrepreneurship," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 6(3), pages 471-490, 08. [Downloadable!] (restricted)
  9. Masters, Adrian M, 1998. "Efficiency of Investment in Human and Physical Capital in a Model of Bilateral Search and Bargaining," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 477-94, May.
  10. Christian Keuschnigg, 2002. "Taxation of a Venture Capitalist with a Portfolio of Firms," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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  11. Samuel Kortum & Josh Lerner, 2000. "Assessing the Contribution of Venture Capital to Innovation," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 674-692, Winter.
  12. Laura Bottazzi & Marco Da Rin, . "Euro.NM and the Financing of European Innovative Firms," Working Papers 171, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
  13. Hellmann, Thomas & Puri, Manju, 2000. "The Interaction between Product Market and Financing Strategy: The Role of Venture Capital," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 13(4), pages 959-84.
  14. James M. Poterba, 1989. "Venture Capital and Capital Gains Taxation," NBER Working Papers 2832, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Steven N. Kaplan & Per Stromberg, 2001. "Venture Capitalists As Principals: Contracting, Screening, and Monitoring," NBER Working Papers 8202, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Repullo, Rafael & Suarez, Javier, 1999. "Venture Capital Finance: A Security Design Approach," CEPR Discussion Papers 2097, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  17. Keuschnigg, Christian & Nielsen, Soren Bo, 2003. "Tax policy, venture capital, and entrepreneurship," Journal of Public Economics, Elsevier, vol. 87(1), pages 175-203, January. [Downloadable!] (restricted)
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  18. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn. [Downloadable!] (restricted)
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