TAXATION OF A VENTURE CAPITALIST WITH A PORTFOLIO OF FIRMS

Transcription

1 TAXATION OF A VENTURE CAPITALIST WITH A PORTFOLIO OF FIRMS CHRISTIAN KEUSCHNIGG CESIFO WORKING PAPER NO. 813 CATEGORY 1: PUBLIC FINANCE DECEMBER 2002 PRESENTED AT CESIFO VENICE SUMMER INSTITUTE, JULY 2002 An electronic version of the paper may be downloaded from the SSRN website: from the CESifo website:

2 CESifo Working Paper No. 813 TAXATION OF A VENTURE CAPITALIST WITH A PORTFOLIO OF FIRMS Abstract Venture capitalists not only finance but also advise and thereby add value to young innovative firms. The prospects of venture capital backed firms thus depend on joint efforts of entrepreneurs and informed venture capitalists, and are subject to double moral hazard. In financing a portfolio of firms, venture capitalists additionally face a trade-off between the number of companies and the amount of managerial advice allocated to each individual venture. The paper argues that managerial support and the number of portfolio firms are inefficiently low in private equilibrium. An optimal tax policy is derived that succeeds to move the private equilibrium towards a first best allocation. Keywords: venture capital, double moral hazard, optimal taxation. JEL Classification: D82, G24, H21, H25. Christian Keuschnigg University of St. Gallen (IFF-HSG) Varnbuelstrasse 19 CH-9000 St. Gallen Switzerland Christian.Keuschnigg@unisg.ch I appreciate constructive comments by participants of CESifo Venice Summer Institute, The Changing Organization of Labour, and, in particular, by V. Kanniainen, S.B. Nielsen and the dicussant C. Lülfesmann.

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27 CESifo Working Paper Series (for full list see Oleksiy Ivaschenko, Growth and Inequality: Evidence from Transitional Economies, June Burkhard Heer, Should Unemployment Benefits be Related to Previous Earnings?, July Bas van Aarle, Giovanni Di Bartolomeo, Jacob Engwerda, and Joseph Plasmans, Staying Together or Breaking Apart: Policy-makers Endogenous Coalitions Formation in the European Economic and Monetary Union, July Hans Gersbach, Democratic Mechanisms: Double Majority Rules and Flexible Agenda Costs, July Bruno S. Frey and Stephan Meier, Pro-Social Behavior, Reciprocity or Both?, July Jonas Agell and Helge Bennmarker, Wage Policy and Endogenous Wage Rigidity: A Representative View From the Inside, July Edward Castronova, On Virtual Economies, July Rebecca M. Blank, U.S. Welfare Reform: What s Relevant for Europe?, July Ruslan Lukach and Joseph Plasmans, Measuring Knowledge Spillovers Using Patent Citations: Evidence from the Belgian Firm s Data, July Aaron Tornell and Frank Westermann, Boom-Bust Cycles in Middle Income Countries: Facts and Explanation, July Jan K. Brueckner, Internalization of Airport Congestion: A Network Analysis, July Lawrence M. Kahn, The Impact of Wage-Setting Institutions on the Incidence of Public Employment in the OECD: , July Sijbren Cnossen, Tax Policy in the European Union, August Chandima Mendis, External Shocks and Banking Crises in Developing Countries: Does the Exchange Rate Regime Matter?, August Bruno S. Frey and Lars P. Feld, Deterrence and Morale in Taxation: An Empirical Analysis, August Lars Calmfors and Åsa Johansson, Nominal Wage Flexibility, Wage Indexation and Monetary Union, August Alexander R. W. Robson and Stergios Skaperdas, Costly Enforcement of Property Rights and the Coase Theorem, August 2002

28 763 Horst Raff, Preferential Trade Agreements and Tax Competition for Foreign Direct Investment, August Alex Cukierman and V. Anton Muscatelli, Do Central Banks have Precautionary Demands for Expansions and for Price Stability? Theory and Evidence, August Giovanni Peri, Knowledge Flows and Knowledge Externalities, August Daniel Friedman and Nirvikar Singh, Equilibrium Vengeance, August Sam Bucovetsky and Michael Smart, The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions, August Tapio Palokangas, International Labour Market Regulation and Economic Growth with Creative Destruction, August Rudi Dornbusch, The New International Architecture, September Hans-Werner Sinn, Weber s Law and the Biological Evolution of Risk Preferences: The Selective Dominance of the Logarithmic Utility Function, September Thomas Mayer, The Macroeconomic Loss Function: A Critical Note, September Seppo Honkapohja and Kaushik Mitra, Learning Stability in Economies with Heterogenous Agents, September David Laidler, Inflation Targets Versus International Monetary Integration A Canadian Perspective, September Morten I. Lau, Panu Poutvaara, and Andreas Wagener, The Dynamic Cost of the Draft, September Steven Brakman, Harry Garretsen, and Charles van Marrewijk, Locational Competition and Agglomeration: The Role of Government Spending, September Anke S. Kessler and Christoph Lülfesmann, The Theory of Human Capital Revisited: On the Interaction of General and Specific Investments, September Kjell Erik Lommerud, Frode Meland and Lars Sørgard, Unionized Oligopoly, Trade Liberalization and Location Choice, September Antonio Merlo and François Ortalo-Magné, Bargaining over Residential Real Estate: Evidence from England, September Yu-Fu Chen and Michael Funke, Exchange Rate Uncertainty and Labour Market Adjustment under Fixed and Flexible Exchange Rates, September Michael S. Michael, International Migration, Income Taxes and Transfers: A Welfare Analysis, September 2002