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Public policy and venture capital financed innovation: A contract design approach

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  • Hirsch, Julia

Abstract

The effects of public policy programs which aim at internalizing spill-overs due to successful innovation are analyzed in a sequential double-sided moral hazard doublesided adverse selection framework. The central focus lies in analyzing their impact on contract design. We show that in our framework only ex post grants are a robust instrument for implementing the first-best situation, whereas the success of guarantee programs, ex ante grants and some types of investment grants depends strongly on the characteristics of the project: in certain cases they not only give no further incentives but even destroy contract mechanisms and so worsen the outcome.

Suggested Citation

  • Hirsch, Julia, 2006. "Public policy and venture capital financed innovation: A contract design approach," CFS Working Paper Series 2006/29, Center for Financial Studies (CFS).
    • Handle: RePEc:zbw:cfswop:200629
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    Cited by:

    1. Edina Berlinger & Anita Lovas & Péter Juhász, 2017. "State subsidy and moral hazard in corporate financing," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 25(4), pages 743-770, December.
    2. Jaaskelainen, Mikko & Maula, Markku & Murray, Gordon, 2007. "Profit distribution and compensation structures in publicly and privately funded hybrid venture capital funds," Research Policy, Elsevier, vol. 36(7), pages 913-929, September.
    3. Meng Wei Chen & Yu Chen & Zhen-Hua Wu & Ningru Zhao, 2018. "Government Intervention, Innovation, and Entrepreneurship," Graz Economics Papers 2018-15, University of Graz, Department of Economics.
    4. Berlinger, Edina & Juhász, Péter & Lovas, Anita, 2015. "Az állami támogatás hatása a projektfinanszírozásra erkölcsi kockázat és pozitív externáliák mellett. Szerződéselméleti megközelítés [The impact of state subsidy on project financing under moral ha," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(2), pages 139-171.

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    More about this item

    Keywords

    Public Policy; Contract Design; Venture Capital; Moral Hazard; Asymmetric Information;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts

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