How to Motivate Fundamental Innovation: Optimal Interactions between Entrepreneurs, Venture Capitalists, and the Government

73 Pages Posted: 23 Jun 2016 Last revised: 16 Jun 2019

See all articles by Onur Bayar

Onur Bayar

University of Texas at San Antonio, College of Business

Thomas J. Chemmanur

Boston College - Carroll School of Management

Mark H. Liu

University of Kentucky - Gatton College of Business and Economics

Date Written: June 2019

Abstract

We analyze the roles of entrepreneurs, venture capitalists (VC), and the government in financing fundamental innovations, defined as those with positive social value net of development costs, but negative net present values to innovating firms. We first analyze the case where the entrepreneur, with or without VC financing, develops innovations. We then analyze government support of innovation and the government's optimal choice between subsidies and innovation prizes. We also analyze the optimal interactions between government subsidies and VC financing, and show that it is optimal for the government to channel subsidies partially through VCs, providing a rationale for government-funded VCs.

Keywords: Financing of innovations; Fundamental innovation; Venture capital financing; Government subsidies; Innovation prizes.

JEL Classification: G24, G32, G38

Suggested Citation

Bayar, Onur and Chemmanur, Thomas J. and Liu, Mark H., How to Motivate Fundamental Innovation: Optimal Interactions between Entrepreneurs, Venture Capitalists, and the Government (June 2019). Available at SSRN: https://ssrn.com/abstract=2799490 or http://dx.doi.org/10.2139/ssrn.2799490

Onur Bayar (Contact Author)

University of Texas at San Antonio, College of Business ( email )

The University of Texas at San Antonio
One UTSA Circle
San Antonio, TX 78249
United States
210-458-6837 (Phone)
210-458-6320 (Fax)

Thomas J. Chemmanur

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

Mark H. Liu

University of Kentucky - Gatton College of Business and Economics ( email )

550 South Limestone
Lexington, KY 40506
United States
859-257-9842 (Phone)
859-257-9688 (Fax)

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