Innovation, Spillovers and Venture Capital Contracts
37 Pages Posted: 20 Jan 2012
Date Written: January 2012
Abstract
Innovative start-ups and venture capitalists are highly clustered, benefiting from localized spillovers: Silicon Valley is perhaps the best example. There is also substantial geographical variation in venture capital contracts: California contracts are more 'incomplete'. This paper explores the economic link between these observations. In the presence of significant spillovers, it becomes optimal for an innovative start-up and its financier to adopt contracts with fewer contingencies: these contracts maximize their ability to extract (part of) the surplus they generate through positive spillovers. This relaxes ex-ante financing constraints and makes it possible to induce higher innovative effort.
Keywords: incomplete contracts, innovation, spillovers, venture capital
JEL Classification: D82, D86, G24, L22
Suggested Citation: Suggested Citation
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