How does the state destroy incentives in innovation financing?

Berlinger, Edina (2018) How does the state destroy incentives in innovation financing? Working Paper. Corvinus University of Budapest Faculty of Economics, Budapest.

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We investigate the effect of state subsidy on the behavior of entrepreneur and venture capitalist in a double moral hazard and fixed investment model under positive externalities. We infer that investment subsidy and success fee improve the incentives, ease credit rationing, hence boost private financing, which explains the popularity of hybrid venture capital systems. The main disadvantage of these systems is, however, that the entrepreneur is encouraged to minimize his/her own capital investment and to ask for the maximal state subsidy available. It may happen that public sources go to entrepreneurs capable to finance their projects privately, so state subsidies increase state deficit (and private profits) without any effects on public welfare leaving other important areas underfinanced. We also prove that state guarantee definitely creates perverse incentives, hence it is not recommended in our model.

Item Type:Monograph (Working Paper)
Series Name:Corvinus Economics Working Papers - CEWP
Series Number / Identification Number:2018/02
Uncontrolled Keywords:innovation financing, venture capital, state subsidy, moral hazard
JEL classification:D21 - Firm Behavior: Theory
G38 - Corporate Finance and Governance: Government Policy and Regulation
H32 - Fiscal Policies and Behavior of Economic Agents: Firm
H50 - National Government Expenditures and Related Policies: General
O38 - Technological Change: Government Policy
Divisions:Faculty of Business Administration > Institute of Finance and Accounting > Department of Finance
Subjects:Economic development
Economic policy
ID Code:3711
Deposited By: Veronika Vit├ęz
Deposited On:20 Sep 2018 10:34
Last Modified:20 Sep 2018 10:34

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