The 2008 crash has left all the established economic doctrines - equilibrium models, real business cycles, disequilibria models - in disarray. Part of the problem is due to Smith’s "veil of ignorance": individuals unknowingly pursue society’s interest and, as a result, have no clue as to the macroeconomic effects of their actions: witness the Keynes and Leontief multipliers, the concept of value added, fiat money, Engel’s law and technical progress, to name but a few of the macrofoundations of microeconomics. A good viewpoint to take bearings anew lies in comparing the post-Great Depression institutions with those emerging from Thatcher and Reagan’s economic policies: deregulation, exogenous vs. endoge- nous money, shadow banking vs. Volcker’s Rule. Very simply, the banks, whose lending determined deposits after Roosevelt, and were a public service became private enterprises whose deposits determine lending. These underlay the great moderation preceding 2006, and the subsequent crash.

The Economic Institutions of Capitalism

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The Theory of Industrial Organization

The East Asian miracle: Economic growth and public policy: By the World Bank. (New York: Oxford University Press for the World Bank, 1993. 389 pp. $19.95, paper.)

The venture captial industry in the United States has grown dramatically over the last two decades Annual inflows to venture funds have expanded from virtually zero in the mid-1970s to more than US$9 billion in 1997 Many of the most visible new firms -including Apple Computer, Genentech, Intel, Lotus, Microsoft and Yahoo - have been backed by venture capital funds Yet despite this tremendous growth and its visible success, venture capital remains a mysterious industry Numerous misconceptions persist about the nature and role of venture capitalists Paul Gompers and Josh Lerner's extensive research on venture capital organizations is based largely on original data sets developed through close relationships with institutional investors in venture capital funds and investment advisors "The Venture Capital Cycle" synthesizes their path-breaking work After an historical overview, the book looks at the formation of funds, the investment of the funds in operating companies and the liquidation of these investments The concluding chapter provides a road map for future research in this growing area Three themes run throughout the book The first is that all venture capitalists confront tremendous incentive and information problems The second is that because the various stages of the venture capital processes are related, the entire process is best viewed as a cycle The third is that, unlike most financial markets, the venture capital industry adjusts very slowly to shifts in the supply of capital and the demand for financing

The venture capital cycle

https://www.nber.org/system/files/working_papers/w14113/w14113.pdf

Bank governance, regulation and risk taking

This paper examines empirical evidence on the impact that venture capitalists can have on the development path of new firms. We use a hand-collected data set on Silicon Valley start-up companies that allows us to "look inside the black box" and analyze the influence of venture capital on the professionalization of firms' internal organization. The evidence suggests that there is a "soft" facet to venture capitalists, in terms of supporting companies to build up their human resources within the organization. Venture capital is also important at the top, in that venture capital backed companies are more likely and faster to bring in outsiders as CEOs. These CEO replacements are often accompanied with the founder departing from the company, suggesting that venture capitalists also exhibit a "hard" facet in terms of exercising control. The paper examines how these various roles are interrelated, and shows how the role of venture capital varies with the state of the company.

Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence

This paper examines the impact venture capital can have on the development of new firms. Using a hand-collected data set on Silicon Valley start-ups, we find that venture capital is related to a variety of professionalization measures, such as human resource policies, the adoption of stock option plans, and the hiring of a marketing VP. Venture-capital-backed companies are also more likely and faster to replace the founder with an outside CEO, both in situations that appear adversarial and those mutually agreed to. The evidence suggests that venture capitalists play roles over and beyond those of traditional financial intermediaries.

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In a dynamic model of moral hazard, competition can undermine prudent bank behavior. While capital-requirement regulation can induce prudent behavior, the policy yields Pareto-inefficient outcomes. Capital requirements reduce gambling incentives by putting bank equity at risk. However, they also have a perverse effect of harming banks' franchise values, thus encouraging gambling. Pareto-efficient outcomes can be achieved by adding deposit-rate controls as a regulatory instrument, since they facilitate prudent investment by increasing franchise values. Even if deposit-rate ceilings are not binding on the equilibrium path, they may be useful in deterring gambling off the equilibrium path.

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Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?

Venture capital financing is widely believed to be influential for new innovative companies. We provide empirical evidence that venture capital financing is related to product market strategies and outcomes of start-ups. Using a unique hand-collected database of Silicon Valley high-tech start-ups. Using a unique hand-collected database of Silicon Valley high-tech start-ups we find that innovator firms are more likely to obtain venture capital than imitator firms. Venture capital is also associated with a significant reduction in the time to bring a product to market, especially for innovators. Our results suggest significant interrelations between investor types and product market dimensions, and a role of venture capital for innovative companies.

The Interaction between Product Market and Financing Strategy: The Role of Venture Capital

Capital requirements are traditionally viewed as an effective form of prudential regulation - by increasing capital the bank internalizes more of the risk of its investment decisions. While the traditional view is accurate in the sense that capital requirement can be effective in combating moral hazard, we find, in contrast, that capital requirements are Pareto inefficient. With deposit insurance, freely determined deposit rates undermine prudent bank behavior. To induce a bank to choose to make prudent investments, the bank must have sufficient franchise value at risk. Free deposit rates combined with competitive markets serve to reduce franchise value to the point where banks gamble. Deposit rate controls create franchise value by increasing the per-period profits of the bank. We find that deposit rate controls combined with capital requirements can more inexpensively replicate any outcome that is induced using capital requirements alone. Even in an economy where the government can credibly commit not to offer deposit insurance, the moral hazard problem may still not disappear and capital requirements alone may not achieve the socially efficient allocation, whereas that allocation can be achieved by also using a deposit rate control.

/pdf/liberalization-moral-hazard-in-banking-and-prudential-2azqqkg00o.pdf

Thomas Hellmann

Papers

Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence

Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence

Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?

The Interaction between Product Market and Financing Strategy: The Role of Venture Capital

Liberalization, Moral Hazard in Banking and Prudential Regulation: Are Capital Requirements Enough?