Taxation of a Venture Capitalist with a Portfolio of Firms

30 Pages Posted: 11 Dec 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)

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Date Written: December 2002

Abstract

Venture capitalists not only finance but also advise and thereby add value to young innovative firms. The prospects of venture capital backed firms thus depend on joint efforts of entrepreneurs and informed venture capitalists, and are subject to double moral hazard. In financing a portfolio of firms, venture capitalists additionally face a trade-off between the number of companies and the amount of managerial advice allocated to each individual venture. The paper argues that managerial support and the number of portfolio firms are inefficiently low in private equilibrium. An optimal tax policy is derived that succeeds to move the private equilibrium towards a first best allocation.

Keywords: Venture Capital, Double Moral Hazard, Optimal Taxation

JEL Classification: D82, G24, H21, H25

Suggested Citation

Keuschnigg, Christian, Taxation of a Venture Capitalist with a Portfolio of Firms (December 2002). CESifo Working Paper Series No. 813; U of St. Gallen, Economics Discussion Paper No. 2003-04. Available at SSRN: https://ssrn.com/abstract=360880

Christian Keuschnigg (Contact Author)

University of St. Gallen – Department of Economics (FGN-HSG) ( email )

Varnbuelstrasse 19
St. Gallen, 9000
Switzerland

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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