A General Equilibrium Study of Venture Capitalists' Effort on Entrepreneurship

Abstract: In this paper, I propose a new general equilibrium model that explains stylized facts about venture capitalists' impact on their portfolio firms. Venture capitalists can help increase firms' productivity, yet they face increasing entry costs to enter. I characterize steady state effort choice, entry threshold, and mass of venture capitalists, and show how they are affected by change in upfront investment, interest rate, and entry costs. The key contribution is that public policy to stimulate startups by subsidizing upfront investments or reducing interest cost have limited success if not accompanied by an increasing supply of experts who can improve business ideas.