Taxes and Venture Capital Support

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Taxes and Venture Capital Support

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Title: Taxes and Venture Capital Support
Author: Keuschnigg, Christian; Nielsen, Søren Bo
Abstract: 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 startups are detrimental in our framework. Keywords: Venture capital, capital gains taxation, double moral hazard. JEL-Classification: D82, G24, H24, H25
URI: http://hdl.handle.net/10398/6821
Date: 2003-11-21

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