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Tax Policy, Venture Capital, and Entrepreneurship

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Author Info
Christian Keuschnigg (University of Saarland)
Soren Bo Nielsen (Copenhagen Business School)

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Abstract

The paper studies the effects of tax policy on entrepreneurship and venture capital activity. Entrepreneurs pursue a single high risk project each but have no own resources. Financiers provide equity finance. They must structure the entrepreneur's profit share and base salary to assure their incentives for full effort and committment to the project. The extent of risk-diversification is, thus, limited by the presence of moral hazard. The contract must also be sufficiently generous to attract entrepreneurs who might pursue alternative career options. In addition to providing equity finance, venture capitalists assist with valuable business advice to enhance survival rates. Within a general equilibrium framework with a traditional and an entrepreneurial sector, the paper investigates the effects of taxes on entrepreneurship and the equilibrium level of managerial advice. It considers differential wage and capital income taxes, a comprehensive income tax, incomplete loss offset, progressive income taxation as well as investment and output subsidies to the entrepreneurial sector.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1848.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1848

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Kihlstrom, Richard E. & Laffont, Jean-Jacques, 1983. "Taxation and risk taking in general equilibrium models with free entry," Journal of Public Economics, Elsevier, vol. 21(2), pages 159-181, July. [Downloadable!] (restricted)
  2. Black, Bernard S. & Gilson, Ronald J., 1998. "Venture capital and the structure of capital markets: banks versus stock markets," Journal of Financial Economics, Elsevier, vol. 47(3), pages 243-277, March. [Downloadable!] (restricted)
  3. Robin Boadway & Nicolas Marceau & Maurice Marchand & Marianne Vigneault, 1998. "Entrepreneurship, Asymmetric Information and Unemployment," Cahiers de recherche CREFE / CREFE Working Papers 57, CREFE, Université du Québec à Montréal. [Downloadable!]
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  4. Cornelli, Francesca & Yosha, Oved, 1997. "Stage Financing and the Role of Convertible Debt," CEPR Discussion Papers 1735, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  5. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August. [Downloadable!] (restricted)
  6. Lerner, Josh, 1995. " Venture Capitalists and the Oversight of Private Firms," Journal of Finance, American Finance Association, vol. 50(1), pages 301-18, March. [Downloadable!] (restricted)
  7. Kai A. Konrad & Wolfram F. Richter, 1995. "Capital Income Taxation and Risk Spreading with Adverse Selection," Canadian Journal of Economics, Canadian Economics Association, vol. 28(3), pages 617-30, August. [Downloadable!] (restricted)
  8. Boadway, Robin & Marchand, Maurice & Pestieau, Pierre, 1991. "Optimal linear income taxation in models with occupational choice," Journal of Public Economics, Elsevier, vol. 46(2), pages 133-162, November. [Downloadable!] (restricted)
  9. James M. Poterba, 1989. "Venture Capital and Capital Gains Taxation," NBER Chapters, in: Tax Policy and the Economy, Volume 3, pages 47-68 National Bureau of Economic Research, Inc. [Downloadable!]
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  10. Repullo, R. & Suarez, J., 1998. "Venture Capital Finance: a Security Design Approach," Papers 9804, Centro de Estudios Monetarios Y Financieros-.
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  11. Gompers, Paul A, 1995. " Optimal Investment, Monitoring, and the Staging of Venture Capital," Journal of Finance, American Finance Association, vol. 50(5), pages 1461-89, December. [Downloadable!] (restricted)
  12. de Meza, David & Webb, David C, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 281-92, May. [Downloadable!] (restricted)
  13. Cornelli, F. & Yosha, O., 1997. "Stage Financing and the Role of Convertible Debt," Papers 23-97, Tel Aviv.
  14. De Meza, David & Webb, David C., 1988. "Credit market efficiency and tax policy in the presence of screening costs," Journal of Public Economics, Elsevier, vol. 36(1), pages 1-22, June. [Downloadable!] (restricted)
  15. Lerner, Josh, 1999. "The Government as Venture Capitalist: The Long-Run Impact of the SBIR Program," Journal of Business, University of Chicago Press, vol. 72(3), pages 285-318, July. [Downloadable!] (restricted)
  16. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October. [Downloadable!] (restricted)
  17. Innes, Robert, 1991. "Investment and government intervention in credit markets when there is asymmetric information," Journal of Public Economics, Elsevier, vol. 46(3), pages 347-381, December. [Downloadable!] (restricted)
  18. Black, Jane & de Meza, David, 1997. "Everyone may benefit from subsidising entry to risky occupations," Journal of Public Economics, Elsevier, vol. 66(3), pages 409-424, December. [Downloadable!] (restricted)
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