Working Paper

The Impact of Public Subsidies on Venture Capital Investments in Start-Up Enterprises

Author

  • Andrea Schertler
Publication Date

The relationship between a venture capitalist and an entrepreneur is modeled to investigate the impact of public subsidies on venture capital investments in start-up enterprises. In this model, the venture capitalist only finances start-up enterprises if he has sufficient expertise to make high-risk investments in new technology profitable in terms of their expected value. It is shown that a venture capitalist who already has sufficient expertise reduces his management support in the start-up enterprise under a public subsidy. Moreover, venture capitalists who do not have sufficient expertise may finance start-up enterprises if future losses of the start-up investment are partly covered by the government.

Info

JEL Classification
D82, G24, G28, L14

Key Words

  • double-sided moral hazard
  • public subsidies
  • start-up investments
  • venture capital