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Taxes and Venture Capital Support

Listed author(s):
  • Christian Keuschnigg

    ()

  • Soren Bo Nielsen

    ()

In this paper we set up a model of start-up finance under double moral hazard. Entrepreneurs lack own resources and business experience to develop their ideas. Venture capitalists can provide start-up finance and commercial support. The effort put forth by either agent contributes to the firm's success, but is not verifiable. As a result, the market equilibrium is biased towards inefficiently low venture capital support. The capital gains tax becomes especially harmful, as it further impairs advice and causes a first-order welfare loss. Once the capital gains tax is in place, limitations on loss off-set may paradoxically contribute to higher quality of venture capital finance and welfare. Subsidies to physical investment in VC-backed start-ups are detrimental in our framework.

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Article provided by Springer in its journal European Finance Review.

Volume (Year): 7 (2003)
Issue (Month): 3 ()
Pages: 515-539

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Handle: RePEc:kap:eurfin:v:7:y:2003:i:3:p:515-539
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  1. 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.
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