Banks, venture capitalists and low innovation traps (joint with Javier Suarez, Cemfi)
Abstract:
< span lang="EN-US" style="font-size: 11.0pt; font-family: Aptos; mso-ansi-la nguage: EN-US; mso-fareast-language: EN-US;">We analyze how competition bet ween banks and venture capitalists affects young firms’ access to credit an d their incentives to innovate. Banks’ long-term funding arrangements provi de lending insurance to firms, facilitating the scale-up of moderate-potent ial firms with limited pledgeable income. Venture capitalists can early ide ntify high-potential firms, cream skimming them from the pool of bank-funde d firms while also improving the return to entrepreneurial innovation. The competitive equilibrium is generally constrained inefficient as no financie r internalizes the effect of its funding on the balance between the benefit s from funding insurance and its impact on the incentives to innovate. Stra tegic complementarities due to the presence of lending insurance can cause multiplicity of equilibria. When venture capitalists ability to identify in novative projects is limited, subsidizing their funding to firms with taxes on banks leads to constrained efficient outcomes and can eliminate self-fu lfilling equilibria with low innovation. The analysis has implications for economies such as the European Union that lag behind the US in terms of bot h innovation and funding opportunities for rising stars.
DTSTAMP:20260703T034004Z DTSTART:20260708T130000Z DTEND:20260708T140000Z SEQUENCE:0 TRANSP:OPAQUE END:VEVENT END:VCALENDAR