Venture capital and microfinance: an instrumental approach
Abstract
Following Adolph Lowe, we divide the economy into two sectors, equipment-goods industries and consumer-goods industries, operating over two periods. A structural relationship between the outputs in the two periods is given by a set of inequalities. One possible outcome is a state of less-than-full utilization of available resources. The economy consists of firms and households. Firms are technology entrepreneurs possessing blueprints for the transformation of the existing inefficient level of output to a full employment level, but no wealth. A subset of households, venture capitalists, is available in each of the three sectors. They finance the technologies in exchange for a share of the profits. We show that a stationary equilibrium exists only in the case when financial contracts are written in the second sector.
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