DP1887 Venture Capital: A Case for Investment Promotion

Author(s): Christian Keuschnigg
Publication Date: July 1998
Keyword(s): corrective subsidies, Externalities, financial sector development, up-start investment
JEL(s): G20, G24, H23, H25, O16
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1887

Venture capitalists provide risk capital and valuable monitoring services that are essential for the success of upstart companies. The financial sector?s expertise in monitoring investment proposals may increase with the accumulated experience in funding such projects. In the other direction, the productivity gains from learning lower the cost of venture capital finance and reinforce start-up investment. Since learning depends on aggregate investment, the effect is external to individual agents. The paper demonstrates how the nature of the externality depends on the state of financial sector development, and how the appropriate tax/subsidy policy should be tailored to it.