Taxes and Venture Capital Support

In this paper we set up a model of start-up finance under double moral hazard. Entrepreneurs lack own resources and business experience to develop their ideas. Venture capitalists can provide start-up finance and commercial support. The effort put forth by either agent contributes to the firm's success, but is not verifiable. As a result, the market equilibrium is biased towards inefficiently low venture capital support. The capital gains tax becomes especially harmful, as it further impairs advice and causes a first-order welfare loss. Once the capital gains tax is in place, limitations on loss off-set may paradoxically contribute to higher quality of venture capital finance and welfare. Subsidies to physical investment in VC-backed start-ups are detrimental in our framework.

[1]  Jerome L. Stein,et al.  Stochastic Optimal Control Modeling of Debt Crises , 2003, SSRN Electronic Journal.

[2]  Concepció Patxot,et al.  On the optimality of PAYG pension systems in an endogenous fertility setting , 2003, Journal of Pension Economics and Finance.

[3]  Per Strömberg,et al.  Characteristics, Contracts, and Actions: Evidence from Venture Capitalist Analyses , 2002 .

[4]  A. Belke,et al.  Exchange Rate Volatility and Employment Growth: Empirical Evidence from the CEE Economies , 2003, SSRN Electronic Journal.

[5]  Samuel Kortum,et al.  Assessing the Contribution of Venture Capital to Innovation , 2000 .

[6]  Thomas Stratmann.  Contribution limits and the effectiveness of campaign spending , 2003 .

[7]  Arno Riedl,et al.  Input Versus Output Taxation in an Experimental International Economy , 2004, SSRN Electronic Journal.

[8]  M. Artis,et al.  Is There a European Business Cycle? , 2003, SSRN Electronic Journal.

[9]  Lars P. Feld,et al.  The Role of Direct Democracy in the European Union , 2003, SSRN Electronic Journal.

[10]  C. Keuschnigg,et al.  Public Policy for Venture Capital , 2001, SSRN Electronic Journal.

[11]  C. Keuschnigg.  Optimal Public Policy for Venture Capital Backed Innovation , 2003 .

[12]  Patrick Waelbroeck,et al.  Piracy of Digital Products: A Critical Review of the Economics Literature , 2003, SSRN Electronic Journal.

[13]  U. Walz,et al.  Financing practices in the German venture capital industry: An empirical assessment , 2002 .

[14]  Christian Keuschnigg,et al.  Tax Policy, Venture Capital, and Entrepreneurship , 2000 .

[15]  Volker Grossmann,et al.  Firm Size and Diversification: Asymmetric Multiproduct Firms Under Cournot Competition , 2003, SSRN Electronic Journal.

[16]  Klaus M. Schmidt,et al.  Convertible Securities and Venture Capital Finance , 2001, SSRN Electronic Journal.

[17]  P. Pestieau,et al.  Wealth Transfer Taxation: A Survey , 2003 .

[18]  Dale J. Poirier,et al.  Relationship between Maternal Behavior During Pregnancy, Birth Outcome, and Early Childhood Development: An Exploratory Study , 2003 .

[19]  C. Hefeker,et al.  Structural Reforms and the Enlargement of Monetary Union , 2000, SSRN Electronic Journal.

[20]  Fwu-Ranq Chang,et al.  On the Elasticities of Harvesting Rules , 2003, SSRN Electronic Journal.

[21]  Christian Keuschnigg,et al.  Start-Ups, Venture Capitalists and the Capital Gains Tax , 2002, SSRN Electronic Journal.

[22]  Michele Moretto,et al.  Investment Size and Firm's Value Under Profit Sharing Regulation , 2003 .

[23]  R. Gordon.  Can High Personal Tax Rates Encourage Entrepreneurial Activity , 1998 .

[24]  U. Woitek,et al.  Electoral Uncertainty, Fiscal Policies & Growth: Theory and Evidence from Germany, the UK and the Us , 2003, SSRN Electronic Journal.

[25]  Javier Suarez,et al.  Venture Capital Finance: A Security Design Approach , 1999 .

[26]  J. Poterba.  CAPITAL GAINS TAX POLICY TOWARD ENTREPRENEURSHIP , 1989, National Tax Journal.

[27]  Catherine Casamatta,et al.  Financing and Advising: Optimal Financial Contracts with Venture Capitalists , 2002 .

[28]  V. Kanniainen,et al.  The Optimal Portfolio of Start-Up Firms in Venture Capital Finance , 2000, SSRN Electronic Journal.

[29]  R. McAfee,et al.  OPTIMAL CONTRACTS FOR TEAMS , 1991 .

[30]  Christian Keuschnigg.  Public Policy and Venture Capital Backed Innovation , 2003 .

[31]  Per Strömberg,et al.  Venture Capitalists as Principals: Contracting, Screening, and Monitoring , 2001 .

[32]  Stefan Napel,et al.  Bargaining and Distribution of Power in the Eu's Conciliation Committee , 2003, SSRN Electronic Journal.

[33]  Per Strömberg,et al.  Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts , 2000 .

[34]  Christian Keuschnigg,et al.  Taxation of a Venture Capitalist with a Portfolio of Firms , 2002, SSRN Electronic Journal.

[35]  Jakob von Weizsäcker,et al.  The Hayek Pension an Efficient Minimum Pension to Complement the Welfare State , 2003 .

[36]  J. Agell,et al.  Why are Small Firms Different? Managers' Views , 2003, SSRN Electronic Journal.

[37]  Lars-Erik Borge,et al.  The Relationships between Costs and User Charges: The Case of a Norwegian Utility Service , 2003, SSRN Electronic Journal.

[38]  J. Choi,et al.  Patent Pools and Cross-Licensing in the Shadow of Patent Litigation , 2003, SSRN Electronic Journal.

[39]  Martin Kolmar,et al.  The Taxation of Financial Capital Under Asymmetric Information and the Tax-Competition Paradox , 2003, SSRN Electronic Journal.

[40]  Roman Inderst,et al.  The Effect of Capital Market Characteristics on the Value of Start-Up Firms , 2002 .

[41]  J. Baten,et al.  Creating Firms for a New Century: Determinants of Firm Creation Around 1900 , 2003, SSRN Electronic Journal.

[42]  Carlo Devillanova,et al.  Capital-Skill Complementarity and the Redistributive Effects of Social Security Reform , 2003, SSRN Electronic Journal.

[43]  V. Kanniainen,et al.  Start-Up Investment with Scarce Venture Capital Support , 2001, SSRN Electronic Journal.

[44]  Stephen M. Horan.  The Interaction between Product Market and Financing Strategy: The Role of Venture Capital , 2001 .

[45]  R. Gilson,et al.  Venture Capital and the Structure of Capital Markets: Banks Versus Stock Markets , 1997 .

[46]  Maureen Were,et al.  An Assessment of the Impact of Hiv/Aids on Economic Growth: The Case of Kenya , 2003, SSRN Electronic Journal.

[47]  A. Masters.  Efficiency of Investment in Human and Physical Capital in a Model of Bilateral Search and Bargaining , 1998 .

[48]  Carlos Fonseca Marinheiro,et al.  Output Smoothing in Emu and OECD: Can We Forego Government Contribution? A Risk Sharing Approach , 2003, SSRN Electronic Journal.

[49]  Bengt Holmstrom,et al.  Moral Hazard in Teams , 1982 .

[50]  Kjetil Bjorvatn,et al.  Decentralization and the Fate of Minorities , 2003, SSRN Electronic Journal.

[51]  Charles Stuart,et al.  Voting and Nonlinear Taxes in a Stylized Representative Democracy , 2003, SSRN Electronic Journal.

[52]  Namkee Ahn,et al.  Bio-Demographic and Health Aspects of Ageing in the EU , 2003, SSRN Electronic Journal.

[53]  Nikolas A. Müller-Plantenberg,et al.  Japan's Imbalance of Payments , 2003, SSRN Electronic Journal.

[54]  Thomas von Ungern-Sternberg.  State Intervention on the Market for Natural Damage Insurance in Europe , 2003 .

[55]  J. Suárez.  Business Creation and the Stock Market , 2000 .

[56]  Andreas Haufler,et al.  Market Structure and the Taxation of International Trade , 2003, SSRN Electronic Journal.

[57]  Henning Bohn.  Will Social Security and Medicare Remain Viable as the U.S. Population is Aging? An Update , 2003, SSRN Electronic Journal.

[58]  Wolfgang Ochel,et al.  Decentralizing Wage Bargaining in Germany - a Way to Increase Employment? , 2003, SSRN Electronic Journal.

[59]  Manju Puri,et al.  Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence , 2000 .

[61]  D. Snower,et al.  The Firm as a Pool of Factor Complementarities , 2003, SSRN Electronic Journal.

[62]  M. Grimaldi,et al.  Bubbling and Crashing Exchange Rates , 2003, SSRN Electronic Journal.

[63]  Olivier Bargain,et al.  Is the Collective Model of Labor Supply Useful for Tax Policy Analysis ? A Simulation Exercise , 2005 .

[64]  Annette Alstadsæter,et al.  Income Tax, Consumption Value of Education, and the Choice of Educational Type , 2003 .

[65]  Jean Pisani-Ferry,et al.  The Surprising French Employment Performance: What Lessons? , 2003, SSRN Electronic Journal.

[66]  Lars P. Feld,et al.  Decentralized Taxation and the Size of Government: Evidence from Swiss State and Local Governments , 2003, SSRN Electronic Journal.

[67]  Paul A. Gompers,et al.  The venture capital cycle , 1999 .