Optimal Public Policy for Venture Capital Backed Innovation

University of St. Gallen Department of Economics Discussion Paper No. 2003-09

62 Pages Posted: 30 May 2003

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: March 2003

Abstract

This paper discusses the role of public policy towards the venture capital industry. The model emphasizes four margins: supply of entrepreneurs due to career choice, entry of venture capital funds and search for investment opportunities, simultaneous entrepreneurial effort and managerial advice subject to double moral hazard, and mark-up pricing when the successful firm introduces a new good. The paper derives an optimal policy that succeeds to implement a first best allocation in decentralized equilibrium. It also considers short- and long-run comparative static and welfare effects of piecemeal reform with regard to the capital gains tax, innovation subsidy, public R&D spending and other policy initiatives.

Keywords: Innovation, venture capital, double moral hazard, public policy

JEL Classification: D82, G24, H21, H25, H32

Suggested Citation

Keuschnigg, Christian, Optimal Public Policy for Venture Capital Backed Innovation (March 2003). University of St. Gallen Department of Economics Discussion Paper No. 2003-09. Available at SSRN: https://ssrn.com/abstract=401821 or http://dx.doi.org/10.2139/ssrn.401821

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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