A search model of venture capital, entrepreneurship, and unemployment

We develop a search model of venture capital where the number of successful matches of entrepreneurs and venture capitalists (VCs) at any moment in time is a func- tion of the number of entrepreneurs searching for funds, the number of VCs searching for entrepreneurs, and the number of vacancies posted by each VC. Our paper extends the literature by incorporating search unemployment and explicitly models the occupa- tional choice decision of individuals to become workers or entrepreneurs. Our analysis shows that, in the market equilibrium, the level of advice VCs oer is ineciently low compared with the social optimum. Furthermore, the VC's portfolio size, the level of employment, and the number of potential entrepreneurs is generally either too low or too high relative to its socially optimal level. Policy to achieve the social optimum consists of a capital gains subsidy, an employment tax or subsidy, and an investment tax or subsidy.