The Role of the Government in the Early Development of American Venture Capital

Whether the government or markets, or a mixture of both, can provide efficient and effective incentives for encouraging entrepreneurial activity and new venture financing is an age-old question. Public promotion efforts are controversial and in most cases they tend to fail. In the United States, debate about the role of government in these areas can be traced back to at least the Great Depression and the period immediately after World War II when the issue became a particular concern. Policy makers considered that existing financial institutions could neither provide the necessary due diligence nor the pool of risk capital that was necessary to spur entrepreneurial ventures. Furthermore, there were calls for additional inducements in the form of tax-related incentives. The mechanisms that were used raise questions about benefits, costs and unintended consequences. Can, and should, the government influence entrepreneurial activity and venture financing? What are the limits to government intervention?