Taxation of a venture capitalist with a portfolio of firms

Venture capitalists not only finance but also advise and therebyadd value to young entrepreneurial firms. The prospects of venturecapital backed firms thus depend on joint efforts of entrepreneursand informed venture capitalists, and are subject to doublemoral hazard. For this reason, managerial support and the numberof portfolio companies tend to be inefficiently low. This paperinvestigates how tax policy can possibly contribute to a moreactive style of venture capital investments. An optimal taxpolicy is derived that moves the private equilibrium towardsa first best allocation.