Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/76107 
Year of Publication: 
2002
Series/Report no.: 
CESifo Working Paper No. 742
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
A model of start-up finance with double moral hazard is proposed. Entrepreneurs have ideas but lack own resources as well as commercial experience. Venture capitalists provide start-up finance and managerial support. Both types of agents thus jointly contribute to the firm's success, but neither type's effort is verifiable. We find that the market equilibrium is biased towards inefficiently low venture capital support. In this situation, the capital gains tax is particularly harmful. The introduction of a small tax impairs managerial advice and leads to first order welfare losses. Once the tax is in place, limitations on loss off-set may paradoxically contribute to higher quality of venture capital backed entrepreneurship and welfare.
Subjects: 
venture capital
capital gains taxation
double moral hazard.
Document Type: 
Working Paper
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