Nicolás Garrido-Sureda

Job Market Paper

Venture Capital, Entrepreneurship, and Innovation

How does venture capital affect innovative entrepreneurship? I present a multi-sector occupational choice model in which agents choose to work or to become entrepreneurs depending on labor market and venture capital financing conditions. My model shows how venture capital affects entrepreneurial innovation and the level of entrepreneurship in the economy. A larger venture capital sector lowers monitoring costs, leading to more entrepreneurs, each one less innovative. As more people choose entrepreneurship, labor costs rise, limiting entrepreneurial innovation. When a sector becomes more productive, demand for venture capital increases, raising monitoring costs across all sectors. Distortions to R&D create spillovers through the market for venture capital. Competition for a shared pool of excludable ideas leads to excessive demand for venture capital, increasing monitoring costs for entrepreneurs and lowering innovation. Reskilling workers across sectors lowers welfare, while R&D subsidies raise welfare by incentivizing some entrepreneurs to work.