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A Search Model of Venture Capital, Entrepreneurship, and Unemployment

Author

Listed:
  • Robin Boadway
  • Oana Secrieru
  • Marianne Vigneault

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.

Suggested Citation

  • Robin Boadway & Oana Secrieru & Marianne Vigneault, 2005. "A Search Model of Venture Capital, Entrepreneurship, and Unemployment," Staff Working Papers 05-24, Bank of Canada.
  • Handle: RePEc:bca:bocawp:05-24
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    References listed on IDEAS

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    1. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, March.
    2. 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.
    3. Robin Boadway & Katherine Cuff & Nicolas Marceau, 2004. "Agglomeration Effects and the Competition for Firms," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(5), pages 623-645, September.
    4. Mathias Dewatripont & Patrick Legros & Steven A. Matthews, 2003. "Moral Hazard and Capital Structure Dynamics," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 890-930, June.
    5. Christian Keuschnigg, 2004. "Venture Capital Backed Growth," Journal of Economic Growth, Springer, vol. 9(2), pages 239-261, June.
    6. Keuschnigg, Christian, 2003. "Optimal Public Policy for Venture Capital Backed Innovation," CEPR Discussion Papers 3850, C.E.P.R. Discussion Papers.
    7. Trester, Jeffrey J., 1998. "Venture capital contracting under asymmetric information," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 675-699, August.
    8. Keuschnigg, Christian & Nielsen, Soren Bo, 2003. "Tax policy, venture capital, and entrepreneurship," Journal of Public Economics, Elsevier, vol. 87(1), pages 175-203, January.
    9. Claudio Michelacci & Javier Suarez, 2004. "Business Creation and the Stock Market," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 459-481.
    10. Amit, Raphael & Brander, James & Zott, Christoph, 1998. "Why do venture capital firms exist? theory and canadian evidence," Journal of Business Venturing, Elsevier, vol. 13(6), pages 441-466, November.
    11. Casamatta, Catherine, 2002. "Financing and Advising: Optimal Financial Contracts with Venture Capitalists," CEPR Discussion Papers 3475, C.E.P.R. Discussion Papers.
    12. Douglas J. Cumming, 2006. "The Determinants of Venture Capital Portfolio Size: Empirical Evidence," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1083-1126, May.
    13. Admati, Anat R & Pfleiderer, Paul, 1994. " Robust Financial Contracting and the Role of Venture Capitalists," Journal of Finance, American Finance Association, vol. 49(2), pages 371-402, June.
    14. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
    15. Gompers, Paul A., 1996. "Grandstanding in the venture capital industry," Journal of Financial Economics, Elsevier, vol. 42(1), pages 133-156, September.
    16. Lerner, Joshua, 1994. "Venture capitalists and the decision to go public," Journal of Financial Economics, Elsevier, vol. 35(3), pages 293-316, June.
    17. Chan, Yuk-Shee, 1983. " On the Positive Role of Financial Intermediation in Allocation of Venture Capital in a Market with Imperfect Information," Journal of Finance, American Finance Association, vol. 38(5), pages 1543-1568, December.
    18. Arthur J. Hosios, 1990. "On The Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Oxford University Press, vol. 57(2), pages 279-298.
    19. Johnson, G.E. & Layard, P.R.G., 1987. "The natural rate of unemployment: Explanation and policy," Handbook of Labor Economics,in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 2, chapter 16, pages 921-999 Elsevier.
    20. Inderst, Roman & Muller, Holger M., 2004. "The effect of capital market characteristics on the value of start-up firms," Journal of Financial Economics, Elsevier, vol. 72(2), pages 319-356, May.
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    Citations

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    Cited by:

    1. Rafael Silveira & Randall Wright, 2016. "Venture Capital: A Model of Search and Bargaining," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 19, pages 232-246, January.
    2. Becsi, Zsolt & Li, Victor E. & Wang, Ping, 2013. "Credit mismatch and breakdown," European Economic Review, Elsevier, vol. 59(C), pages 109-125.
    3. Rocheteau, Guillaume & Rodriguez-Lopez, Antonio, 2014. "Liquidity provision, interest rates, and unemployment," Journal of Monetary Economics, Elsevier, vol. 65(C), pages 80-101.
    4. Angela Cipollone & Paolo E. Giordani, 2016. "When Entrepreneurs Meet Financiers: Evidence from the Business Angel Market," Working Papers CELEG 1601, Dipartimento di Economia e Finanza, LUISS Guido Carli.
    5. repec:eee:jeborg:v:163:y:2019:i:c:p:297-331 is not listed on IDEAS
    6. Angela Cipollone & Paolo Giordani, 2012. "Animal Spirits and Entrepreneurial Innovation: Theory and Evidence," Working Papers CASMEF 1210, Dipartimento di Economia e Finanza, LUISS Guido Carli.
    7. Cipollone, Angela & Giordani, Paolo E., 2019. "Market frictions in entrepreneurial innovation: Theory and evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 163(C), pages 297-331.
    8. Paolo Giordani, 2015. "Entrepreneurial finance and economic growth," Journal of Economics, Springer, vol. 115(2), pages 153-174, June.

    More about this item

    Keywords

    Financial markets; Fiscal policy; Labour markets;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • 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, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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