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Public Policy for Venture Capital

  • Christian Keuschnigg

    ()

  • Soren Nielsen

    ()

This paper proposes a simple partial equilibrium model to investigate the effects of government policy on venture capital backed investments. Giving up an alternative career, entrepreneurs focus their effort on a single, high risk venture each. Venture capitalists acquire an equity stake and offer a base salary as well. In addition to providing incentive compatible equity finance, they support the venture with managerial advice to raise survival chances. We analyze several policy measures addressed at venture capital activity: government spending on entrepreneurial training, subsidies to equipment investment, and output subsidies at the production stage. While these measures stimulate entrepreneurship, only cost-effective government services can improve welfare. Copyright Kluwer Academic Publishers 2001

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File URL: http://hdl.handle.net/10.1023/A:1011251920041
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Article provided by Springer & International Institute of Public Finance in its journal International Tax and Public Finance.

Volume (Year): 8 (2001)
Issue (Month): 4 (August)
Pages: 557-572

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Handle: RePEc:kap:itaxpf:v:8:y:2001:i:4:p:557-572
DOI: 10.1023/A:1011251920041
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  1. Hoff, Karla, 1994. "The second theorem of the second best," Journal of Public Economics, Elsevier, vol. 54(2), pages 223-242, June.
  2. Keuschnigg, Christian & Nielsen, Soren Bo, 2000. "Tax Policy, Venture Capital and Entrepreneurship," CEPR Discussion Papers 2626, C.E.P.R. Discussion Papers.
  3. Mike Wright & Harry J. Sapienza (ed.), 2003. "Venture Capital," Books, Edward Elgar Publishing, volume 0, number 2988.
  4. Cornelli, F. & Yosha, O., 1997. "Stage Financing and the Role of Convertible Debt," Papers 23-97, Tel Aviv.
  5. Boadway, Robin & Marchand, Maurice & Pestieau, Pierre, 1991. "Optimal linear income taxation in models with occupational choice," Journal of Public Economics, Elsevier, vol. 46(2), pages 133-162, November.
  6. Rafael Repullo & Javier Suarez, 2004. "Venture Capital Finance: A Security Design Approach," Review of Finance, European Finance Association, vol. 8(1), pages 75-108.
  7. Kanniainen, V. & Keuschnigg, C., 2000. "The Optimal Portfolio of Start-up Firms in Venture Capital Finance," University of Helsinki, Department of Economics 486, Department of Economics.
  8. Bruce C. Greenwald & Joseph E. Stiglitz, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 101(2), pages 229-264.
  9. Josh Lerner, 1996. "The Government as Venture Capitalist: The Long-Run Effects of the SBIR Program," NBER Working Papers 5753, National Bureau of Economic Research, Inc.
  10. Mark Casson (ed.), 1990. "Entrepreneurship," Books, Edward Elgar Publishing, number 537.
  11. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
  12. Storey, D. J. & Tether, B. S., 1998. "Public policy measures to support new technology-based firms in the European Union," Research Policy, Elsevier, vol. 26(9), pages 1037-1057, April.
  13. Roger H. Gordon, 1998. "Can High Personal Tax Rates Encourage Entrepreneurial Activity?," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 49-80, March.
  14. Sven Steinmo (ed.), 1998. "Tax Policy," Books, Edward Elgar Publishing, number 1156.
  15. Cornelli, Francesca & Yosha, Oved, 1997. "Stage Financing and the Role of Convertible Debt," CEPR Discussion Papers 1735, C.E.P.R. Discussion Papers.
  16. Poterba, James M., 1989. "Capital Gains Tax Policy Toward Entrepreneurship," National Tax Journal, National Tax Association, vol. 42(3), pages 375-89, September.
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