Discussion paper

DP3850 Optimal Public Policy for Venture Capital Backed Innovation

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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Citation

Keuschnigg, C (2003), ‘DP3850 Optimal Public Policy for Venture Capital Backed Innovation‘, CEPR Discussion Paper No. 3850. CEPR Press, Paris & London. https://cepr.org/publications/dp3850