Entrepreneurial activity in markets with imperfections

This dissertation consists of three essays concerning entrepreneurship, venture capital and monetary economics. It takes time for a venture capitalist to find a project in which to invest, to implement projects and to cash out. Further, capitalists and entrepreneurs are uncertain about whom they will encounter, and upon setting a venture, they bargain over how to split the returns. Such facts make venture capital and technology transfers natural applications for the Search framework, since it focus on timing, uncertainty of meetings and bargaining. Moreover, the fact that liquidity is critical—because venture capitalists raise funds before they enter the market—, fits well with recent Monetary Search Theory. The models here provide contributions and extensions of Search Theory more generally. Essay 1— The Market for Ideas —studies technology transactions and entrepreneurship. It analyzes technology transfers in an environment where the financing market is not perfect and time, non-competitive pricing, and availability of immediate capital are all crucial. We determined which ideas get traded in equilibrium, compare this to the efficient outcome, and discuss policy implications. In Essay 2— The Venture Capital Market —, we develop an equilibrium model of venture capital markets, characterized by the following cycle: (i) capitalists raise funds; (ii) capitalists match with entrepreneurs; (iii) once matched, capitalists and entrepreneurs both take active roles in implementation; (iv) when the venture matures, the capitalist exits to start the cycle anew. We determine the durations of each phase in the cycle, the amount of funds that flow into the market, and the returns to both entrepreneurs and capitalists. In Essay 3— Capital Flows and the Venture Financing Cycle —, we extended the previous models by incorporating start-up costs and returns that are random across potential enterprises. Of the many applications this integrated model has, we answered: (i) how the criterion to select projects depends on the realization of the start-up cost, (ii) how the ex ante liquidity choice is affected by random returns, and (iii) how the whole market is affected by changes in the distribution of returns and in the cost of liquidity