Start-ups, Venture Capitalists and the Capital Gains Tax

Søren Nielsen and Christian Keuschnigg

No 3263, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: A model of start-up finance with double moral hazard is proposed. Entrepreneurs have ideas but lack their 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 offset may paradoxically contribute to higher quality of venture capital backed entrepreneurship and welfare.

Keywords: Venture capital; Capital gains taxation; Double moral hazard (search for similar items in EconPapers)
JEL-codes: D82 G24 H24 H25 (search for similar items in EconPapers)
Date: 2002-03
New Economics Papers: this item is included in nep-cfn
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Citations: View citations in EconPapers (19)

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Related works:
Journal Article: Start-ups, venture capitalists, and the capital gains tax (2004)
Working Paper: Start-ups, Venture Capitalists, and the Capital Gains Tax (2002)
Working Paper: Start-ups, Venture Capitalists, and the Capital Gains Tax (2002)
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