Start-Ups, Venture Capitalists, and the Capital Gains Tax

Keuschnigg, Christian; Nielsen, Soren Bo

doi:10.2139/ssrn.302109

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Start-Ups, Venture Capitalists, and the Capital Gains Tax

47 Pages Posted: 19 Mar 2002

See all articles by Christian Keuschnigg

Christian Keuschnigg

University of St. Gallen – Department of Economics (FGN-HSG); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Soren Bo Nielsen

Copenhagen Business School - Department of Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

There are 2 versions of this paper

Date Written: June 2002

Abstract

A model of start-up finance with double moral hazard is proposed. Entrepreneurs have ideas but lack own resources as well as commercial experience. Venture capitalists provide start-up finance and managerial support. Both types of agents thus jointly contribute to the firm's success, but neither type's effort is verifiable. We find that the market equilibrium is biased towards inefficiently low venture capital support. In this situation, the capital gains tax is particularly harmful. The introduction of a small tax impairs managerial advice and leads to first order welfare losses. Once the tax is in place, limitations on loss off-set may paradoxically contribute to higher quality of venture capital backed entrepreneurship and welfare.

Keywords: Venture Capital, Capital Gains Taxation, Double Moral Hazard

JEL Classification: D82, G24, H24, H25

Suggested Citation: Suggested Citation

Keuschnigg, Christian and Nielsen, Soren Bo, Start-Ups, Venture Capitalists, and the Capital Gains Tax (June 2002). Available at SSRN: https://ssrn.com/abstract=302109 or http://dx.doi.org/10.2139/ssrn.302109