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Public Policy for Venture Capital

  • Christian Keuschnigg
  • Søren Bo 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.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 486.

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Date of creation: 2001
Date of revision:
Handle: RePEc:ces:ceswps:_486
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  1. Sven Steinmo (ed.), 1998. "Tax Policy," Books, Edward Elgar Publishing, number 1156, 10.
  2. Christian Keuschnigg & Soren Bo Nielsen, 2000. "Tax Policy, Venture Capital, and Entrepreneurship," NBER Working Papers 7976, National Bureau of Economic Research, Inc.
  3. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
  4. 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.
  5. Repullo, R. & Suarez, J., 1998. "Venture Capital Finance: a Security Design Approach," Papers 9804, Centro de Estudios Monetarios Y Financieros-.
  6. Hoff, Karla, 1994. "The second theorem of the second best," Journal of Public Economics, Elsevier, vol. 54(2), pages 223-242, June.
  7. 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.
  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. repec:pal:imfstp:v:45:y:1998:i:1:p:49-80 is not listed on IDEAS
  10. Mark Casson (ed.), 1990. "Entrepreneurship," Books, Edward Elgar Publishing, number 537, 10.
  11. 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.
  12. Cornelli, Francesca & Yosha, Oved, 1997. "Stage Financing and the Role of Convertible Debt," CEPR Discussion Papers 1735, C.E.P.R. Discussion Papers.
  13. 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.
  14. Cornelli, F. & Yosha, O., 1997. "Stage Financing and the Role of Convertible Debt," Papers 23-97, Tel Aviv.
  15. Poterba, James M., 1989. "Capital Gains Tax Policy Toward Entrepreneurship," National Tax Journal, National Tax Association, vol. 42(3), pages 375-89, September.
  16. Mike Wright & Harry J. Sapienza (ed.), 2003. "Venture Capital," Books, Edward Elgar Publishing, volume 0, number 2988, 10.
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