IDEAS home Printed from https://ideas.repec.org/a/bla/germec/v10y2009ip71-90.html
   My bibliography  Save this article

A Soft Budget Constraint Explanation for the Venture Capital Cycle

Author

Listed:
  • Georg Gebhardt

Abstract

We explore why venture capital funds limit the amount of capital they raise and do not reinvest the proceeds. This structure is puzzling because it leads to a succession of several funds financing each new venture, which multiplies the well-known agency problems. We argue that an inside investor cannot provide a hard budget constraint while a less informed outsider can. Therefore, the venture capitalist delegates the continuation decision to the outsider by ex ante restricting the amount of capital he has under management. The soft budget constraint problem becomes the more important the higher the entrepreneur's private benefits are and the higher the probability of failure of a project is. Copyright 2008 The Author. Journal Compilation Verein für Socialpolitik and Blackwell Publishing Ltd. 2008.

Suggested Citation

  • Georg Gebhardt, 2009. "A Soft Budget Constraint Explanation for the Venture Capital Cycle," German Economic Review, Verein für Socialpolitik, vol. 10, pages 71-90, February.
    • Handle: RePEc:bla:germec:v:10:y:2009:i::p:71-90
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    References listed on IDEAS

    as
    1. M. Dewatripont & E. Maskin, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 62(4), pages 541-555.
    2. Klaus M. Schmidt, 2003. "Convertible Securities and Venture Capital Finance," Journal of Finance, American Finance Association, vol. 58(3), pages 1139-1166, June.
    3. Kornai, J, 1979. "Resource-Constrained versus Demand-Constrained Systems," Econometrica, Econometric Society, vol. 47(4), pages 801-819, July.
    4. Schmidt, Klaus M, 1996. "The Costs and Benefits of Privatization: An Incomplete Contracts Approach," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 12(1), pages 1-24, April.
    5. Schmidt, Klaus M., 1996. "Incomplete contracts and privatization," European Economic Review, Elsevier, vol. 40(3-5), pages 569-579, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. János Kornai, 2014. "The soft budget constraint," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 64(supplemen), pages 25-79, November.
    2. Wu, Ting & Yang, Shuwang & Tan, Jingjing, 2020. "Impacts of government R&D subsidies on venture capital and renewable energy investment -- an empirical study in China," Resources Policy, Elsevier, vol. 68(C).
    3. Ma, Yu & Zhang, Tingting & Qian, Wenyu & Wei, Danqi, 2022. "Financial development, demographic changes, and the growth of the non-hydro renewable energy Industry—An empirical test based on R&D and financing costs," Renewable Energy, Elsevier, vol. 185(C), pages 217-229.
    4. Izabela Jonek-Kowalska, 2022. "Assessing the energy security of European countries in the resource and economic context," Oeconomia Copernicana, Institute of Economic Research, vol. 13(2), pages 301-334, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gebhardt, Georg, 2006. "A Soft Budget Constraint Explanation for the Venture Capital Cycle," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 173, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    2. Georg Gebhardt, 2009. "A Soft Budget Constraint Explanation for the Venture Capital Cycle," German Economic Review, Verein für Socialpolitik, vol. 10(1), pages 71-90, February.
    3. Georg Gebhardt, 2000. "Innovation and Venture Capital," Econometric Society World Congress 2000 Contributed Papers 1404, Econometric Society.
    4. de Bettignies, Jean-Etienne & Ross, Thomas W., 2009. "Public-private partnerships and the privatization of financing: An incomplete contracts approach," International Journal of Industrial Organization, Elsevier, vol. 27(3), pages 358-368, May.
    5. Emmanuelle Auriol & Pierre M. Picard, 2009. "Government Outsourcing: Public Contracting with Private Monopoly," Economic Journal, Royal Economic Society, vol. 119(540), pages 1464-1493, October.
    6. Emmanuelle Auriol & Pierre M. Picard, 2008. "Infrastructure and Public Utilities Privatization in Developing Countries," The World Bank Economic Review, World Bank, vol. 23(1), pages 77-100, November.
    7. Filippo Belloc, 2014. "Innovation in State-Owned Enterprises: Reconsidering the Conventional Wisdom," Journal of Economic Issues, Taylor & Francis Journals, vol. 48(3), pages 821-848.
    8. Auriol, Emmanuelle & Blanc, Aymeric, 2009. "Capture and corruption in public utilities: The cases of water and electricity in Sub-Saharan Africa," Utilities Policy, Elsevier, vol. 17(2), pages 203-216, June.
    9. Clarke, George R.G. & Cull, Robert & Shirley, Mary M., 2005. "Bank privatization in developing countries: A summary of lessons and findings," Journal of Banking & Finance, Elsevier, vol. 29(8-9), pages 1905-1930, August.
    10. Yingyi Qian & Barry R. Weingast, 1997. "Federalism as a Commitment to Reserving Market Incentives," Journal of Economic Perspectives, American Economic Association, vol. 11(4), pages 83-92, Fall.
    11. Aristotelis Boukouras, 2015. "Separation of Ownership and Control: Delegation as a Commitment Device," Discussion Papers in Economics 15/02, Division of Economics, School of Business, University of Leicester.
    12. Debande, Olivier & Friebel, Guido, 2004. "A positive theory of give-away privatization," International Journal of Industrial Organization, Elsevier, vol. 22(8-9), pages 1309-1325, November.
    13. Xu, Cheng-Gang & Maskin, Eric, 2001. "Soft Budget Constraint Theories: From Centralization to the Market," CEPR Discussion Papers 2715, C.E.P.R. Discussion Papers.
    14. Kang, Fei & Hauge, Janice A. & Lu, Ting-Jie, 2012. "Competition and mobile network investment in China’s telecommunications industry," Telecommunications Policy, Elsevier, vol. 36(10), pages 901-913.
    15. AURIOL, Emmanuelle & PICARD, Pierre, 2004. "Liberal regulation : privatization of natural monopolies with adverse selection," LIDAM Discussion Papers CORE 2004013, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    16. Carlo Cambini & Yossi Spiegel, 2016. "Investment and Capital Structure of Partially Private Regulated Firms," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 25(2), pages 487-515, April.
    17. Patrick W. Schmitz, 2006. "Information Gathering, Transaction Costs, and the Property Rights Approach," American Economic Review, American Economic Association, vol. 96(1), pages 422-434, March.
    18. Megginson, William Leon, 2005. "The Financial Economics of Privatization," OUP Catalogue, Oxford University Press, number 9780195150629, Decembrie.
    19. Süssmuth Bernd & von Weizsäcker Robert K., 2011. "Shooting Rampages and Maintenance of Campus Safety: An Incomplete Contracts Perspective," Review of Law & Economics, De Gruyter, vol. 7(2), pages 573-600, December.
    20. Jean-Etienne de Bettignies & Thomas W. Ross, 2010. "The Economics of Public–Private Partnerships: Some Theoretical Contributions," Chapters, in: Graeme A. Hodge & Carsten Greve & Anthony E. Boardman (ed.), International Handbook on Public–Private Partnerships, chapter 7, Edward Elgar Publishing.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:germec:v:10:y:2009:i::p:71-90. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley-Blackwell Digital Licensing or Christopher F. Baum (email available below). General contact details of provider: https://edirc.repec.org/data/vfsocea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.