"Optimism under uncertainty in venture capital"
We model uncertainty in the venture capital sector through an investor’s fear of model misspecification, as in Hansen and Sargent (2008) using an endogenous growth model to capture the focus of venture capital on technology investment. We then alter the uncertainty aversion framework slightly to allow for uncertainty- loving, or optimistic, behavior. We find that market imperfections central to the endogenous growth model allow for perturbations to be welfare increasing. Furthermore, such perturbations also increase the investor’s realized utility, which we interpret as meaning it is optimal for the investor to have non-rational preferences.
“From debt to equity: did policy makers get it right?”
This paper addresses the impact of investment contracts in venture capital on the wider economy. Specifically, we address the shift from debt to equity contracts in the technology sector in the late 1970s by building debt and equity contracts into the endogenous growth model of Rivera-Batiz and Romer (1994). We find that the shift in contract can explain the increase in level of technology investment in the early 1980s, as more capital becomes available due to the sharing of windfall from positive technological shocks. This windfall, in turn, magnifies the positive externality from technological innovation, and allows it to propagate over the business cycle. We conclude that the shift from debt to equity was a positive change, and would recommend against efforts to increase the use of debt contracts in the technology sector.
“Venture capital in a credit crunch: a structural analysis”
This paper serves to explain cyclical-level changes in venture capital investment levels in a credit crunch. We use a net worth multiplier of Bernanke (1983) to model credit restrictions and the endogenous growth model of Romer (1990) to model the focus of venture capital on technology investment. We find the increased investment from a technological discovery will amplify oscillations in the investment level, causing a far greater disturbance than the shock would suggest without endogenous growth. Furthermore, the model helps explain the differences in reaction of the venture capital sector to the economic downturns of 2001 and 2008.