Discussion Paper Details

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Title: Innovation, Spillovers and Venture Capital Contracts

Author(s): Roberta Dessí

Publication Date: January 2012

Keyword(s): incomplete contracts, innovation, spillovers and venture capital

Programme Area(s): Industrial Organization

Abstract: Innovative start-ups and venture capitalists are highly clustered, benefiting from localized spillovers: Silicon Valley is perhaps the best example. There is also substantial geographical variation in venture capital contracts: California contracts are more 'incomplete'. This paper explores the economic link between these observations. In the presence of significant spillovers, it becomes optimal for an innovative start-up and its financier to adopt contracts with fewer contingencies: these contracts maximize their ability to extract (part of) the surplus they generate through positive spillovers. This relaxes ex-ante financing constraints and makes it possible to induce higher innovative effort.

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Bibliographic Reference

Dessí, R. 2012. 'Innovation, Spillovers and Venture Capital Contracts'. London, Centre for Economic Policy Research.