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Oxford Economic Papers 56 (2004), 285-306
© Oxford University Press 2004; All rights reserved

Taxation of a venture capitalist with a portfolio of firms

Christian Keuschnigg

University of St. Gallen (IFF-HSG), Varnbuelstrasse 19, CH-9000 St. Gallen, Switzerland; e-mail: Christian.Keuschnigg{at}unisg.ch

Venture capitalists not only finance but also advise and thereby add value to young entrepreneurial 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. For this reason, managerial support and the number of portfolio companies tend to be inefficiently low. This paper investigates how tax policy can possibly contribute to a more active style of venture capital investments. An optimal tax policy is derived that moves the private equilibrium towards a first best allocation.


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