Analysis of the Incentive and Supervisory Strategies for Government Venture Capital Guide Fund

Purposes/Significance Rent-seeking behaviors of entrusted agencies will cause the investment operation of the Government Venture Capital Guide Fund to deviate from the predetermined policy objectives. Improving the incentive and supervisory mechanism to prevent moral hazards of entrusted agencies is of great significance to ensure the investment operation of the Guide Fund meets regulatory requirements. Designs/Methodology By introducing the supervisory cost and penalty function, and combining them with Holmstrom-Milgrom’s linear incentive model, an incentive and supervisory model for rent-seeking behaviors of entrusted agencies is established. Findings/Conclusions On the one hand, the optimal level of incentive and supervision is affected by the characteristics of government and the Guide Fund, including the supervisory cost of government, punishment for rent-seeking behaviors and the uncertainty of market environment of the Guide Fund; on the other hand, it is also related to the performance cost, rent-seeking cost and risk preference of entrusted agencies. The government should formulate incentive and supervisory strategies on the basis of comprehensive consideration of the impact of these parameters. Further analysis shows that the governance effect achieved by the incentive or supervisory strategies alone is not optimal. However, combining the two strategies can effectively reduce rent-seeking behaviors, decrease principal-agent cost and maximize government revenue.