Fostering Entrepreneurship: Promoting Founding or Funding?

Governments across the globe are eager to foster entrepreneurial ecosystems, yet there is no consensus on what policies to use. We develop a theory about the equilibrium consequences of two canonical types of entrepreneurship policies: policies that encourage entrepreneurs to found new ventures, and policies that encourage investors to fund new ventures. We distinguish between a short-term impact on current market activity, versus a long-term impact on future activity. Investing in entrepreneurial ventures requires tacit knowledge that is mainly acquired through prior entrepreneurial experience, implying that the supply of capital depends on successful entrepreneurs from prior generations. Recognizing this intergenerational linkage has a profound impact on the market equilibrium, and the effect of entrepreneurship policies. Our analysis identifies a rationale for using funding polices.