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Taxes and Venture Capital Support

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  • Christian Keuschnigg
  • Soren Bo Nielsen

Abstract

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. JEL classification codes: D82, G24, H24, H25

Suggested Citation

  • Christian Keuschnigg & Soren Bo Nielsen, 2003. "Taxes and Venture Capital Support," Review of Finance, European Finance Association, vol. 7(3), pages 515-539.
    • Handle: RePEc:oup:revfin:v:7:y:2003:i:3:p:515-539.
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    File URL: http://hdl.handle.net/10.1023/B:EUFI.0000022144.17225.35
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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • 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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