Public Policy, Start-up Entrepreneurship and the Market for Venture Capital

Abstract

In recent years, venture capital has become an important source for financing young entrepreneurial firms. Given the apparently more innovative nature and extra value added of venture capital backed firms compared to other firms, policy makers have taken an increasing interest in an active venture capital industry. We explore how selected policy instruments determine the incentives of individuals to start up new firms and of venture capitalists to finance and advise them, and how policy thereby influences the size and nature of the industry and how it affects aggregate welfare.We examine the impact of wage and corporate income taxes as well as capital gains taxes and start-up capital subsidies on the volume and quality of venture capital backed entrepreneurship.