The Staged Financing Selection Mechanism for Government to Maximize the Green Benefits of Start-Ups

Abstract

In this study, we investigate the most common forms of government grant in green start-ups, which are appropriation, interest-free bank loans, and tax subsidies. These mechanisms are used to mitigate the problem of higher research costs and sunk costs of start-ups on green innovation and help venture investors better monitor the business plan, asset use, and agency cost and regularly collect information of start-ups to retain the right to terminate financing projects and improve the efficiency of them. The aim of this work is to develop a theoretical model of the agency among the government, the venture capitalists who only pursue monetary income, the strategy investors who pursue strategic objectives and monetary income, and the entrepreneur who takes into account both the influence of different forms of government grant on entrepreneur financing at a different stage and the improved monitoring process of venture investors owe to the staged capital infusion of government. The model shows that the optimal staged financing decision is given when the first target of the government is to achieve social welfare optimization and the secondary goal of maximizing green benefits. Moreover, the model explains the optimal staged financing decision of venture investors and equity stake share in different rounds. Ultimately, we find the optimal staged financing portfolios for green start-ups to acquire venture investment, reduce the staged financing uncertainty, and help the government realize a national green innovation strategy.