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Moral Hazard, Government Regulation and the Financing of High-tech SMEs
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TitleMoral Hazard, Government Regulation and the Financing of High-tech SMEs  
AuthorYan Zhixiong, Zhang Jingwei and Fei Fangyu  
OrganizationJinan University,Shanghai Jiao Tong University 
Key WordsVenture Capital; Moral Hazard; Government Regulation; Monitoring; Collusion 
AbstractPolicy makers around the world have become increasingly concerned about the availability of the financing of high-tech SMEs especially in the seed stage, start-up stage and early stage. Despite the government venture capital funds is a widely used way to support high-tech SMEs, the organization forms are not all the same. In terms of the difference of contributive proportion, government-oriented venture capital funds and private venture capital fund are the two extreme forms of government guidance funds. A natural and important question is, which type of venture capital funds can make the financing of high-tech SMEs more available. This paper argues that, when the entrepreneur's moral hazard problem is very serious, the high agency cost would weaken the availability of venture capital despite the cost of government-oriented venture capital funds is cheap. Alternatively, although the private venture capital funds can reduce agency cost, the monitor cost and high return rate of venture capitalists will increase the cost of financing of entrepreneur. Government guiding funds happen to be a compromise of the two: it can not only make use of the venture capitalists reducing agency cost, but also make entrepreneurs get cheap capital from the government. This paper proves that, even considering the collusion problem and government funding constraints, the availability of government guiding fund is still the highest. Considering the crowding out effect, the optimal proportion of government funds should depend on the trade-off between the availability of venture capital and crowding out effect. Undoubtedly, this paper clearly explains why the government guide fund is so successful. 
Serial NumberWP686 
  • Institute of Economics, Chinese Academy of Social Sciences
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