Venture Capital and the Macroeconomy
Review of Financial Studies, Forthcoming
Jacobs Levy Equity Management Center for Quantitative Financial Research Paper
80 Pages Posted: 13 Jan 2014 Last revised: 12 Aug 2020
I develop a model of venture capital (VC) intermediation that quantitatively explains central empirical facts about VC activity and can evaluate its macroeconomic relevance. The impact of VC-backed innovations is significantly larger than suggested by observed aggregate venture exit valuations, even after accounting for large exposures to systematic and uninsurable idiosyncratic risks. The risk properties of venture capital play a quantitatively important role in both explaining empirical regularities and shaping the value of ventures' contributions to economic growth. The model is analytically tractable and yields exact solutions, despite the presence of matching frictions, imperfect risk sharing, and endogenous growth.
Keywords: Venture Capital, Economic Growth, Innovation, Intermediation, Boom-Bust Cycles, Risk Premia, Uninsurable Idiosyncratic Risk
JEL Classification: G24, G12, O16, O31, O43
Suggested Citation: Suggested Citation