According to this view, government programs can identify and support the creation of new firms in industries that do not attract private venture capital. Private venture capitalists herd themselves into particular industries at the expense of others. Government certification of promising firms can shift some of private venture capital into these neglected industries.
The second rationale for government intervention stems from the positive externality created through research and development (R&D), which makes the social rate of return on R&D expenditures to exceed the private rate of return by a considerable amount.
The third rationale for government venture capital programs is based on the empirical evidence that new entrepreneurs are liquidity-constrained. Liquidity constraints are caused by informational asymmetries between shareholders and managers, either of the adverse selection or moral hazard type.
These informational asymmetries negatively affect the willingness of traditional investors (venture capitalists and banks) to invest in start-ups. Government venture capital investments can help to alleviate these liquidity constraints.
|Public Venture Capital|