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Discussion Paper Details

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Title: Optimal Public Policy for Venture Capital Backed Innovation

Author(s): Christian Keuschnigg

Publication Date: March 2003

Keyword(s): double moral hazard, innovation, public policy and venture capital

Programme Area(s): Public Economics

Abstract: This Paper discusses the role of public policy towards the venture capital industry. The model emphasises 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.

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Bibliographic Reference

Keuschnigg, C. 2003. 'Optimal Public Policy for Venture Capital Backed Innovation'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=3850