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Innovation, Spillovers and Venture Capital Contracts

  • Dessí, Roberta

Innovative start-ups and venture capitalists are highly clustered, benefiting from localized spillovers: Silicon Valley is perhaps the best example. There is also substantial geographical variation in venture capital contracts: California contracts are more 'incomplete'. This paper explores the economic link between these observations. In the presence of significant spillovers, it becomes optimal for an innovative start-up and its financier to adopt contracts with fewer contingencies: these contracts maximize their ability to extract (part of) the surplus they generate through positive spillovers. This relaxes ex-ante financing constraints and makes it possible to induce higher innovative effort.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8731.

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Date of creation: Jan 2012
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Handle: RePEc:cpr:ceprdp:8731
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