Does Size Matter? The Real Effects of Subsidizing Small Firms

63 Pages Posted: 10 Sep 2019 Last revised: 5 Jun 2023

See all articles by Matthew Denes

Matthew Denes

Carnegie Mellon University - Tepper School of Business

Ran Duchin

Boston College - Carroll School of Management

John Hackney

University of South Carolina - Department of Finance

Date Written: June 5, 2023

Abstract

We estimate the economic effects of small business subsidies in the United States. The analyses focus on vast changes in industry size standards, which determine small firms’ eligibility for federal subsidies, and exploit randomness in the timing of size standard changes across industries following the Small Business Jobs Act of 2010. We find that size standards have increased considerably over the past decade, leading to a crowding out of the smallest firms, as reflected by lower shares of small businesses in employment and payroll. Consequently, business dynamism, measured by establishment expansions and contractions, declines. Furthermore, employment growth decreases, wages drop, and displaced workers become unemployed. We provide micro-level evidence from large government subsidy programs, including procurement contracts, guaranteed credit, and the Paycheck Protection Program, that the allocation of subsidies to the smallest firms has declined. Overall, we provide causal estimates that small business subsidies support job creation and economic growth.

Keywords: government subsidies, small firms, employment, procurement

JEL Classification: E24, G38, H25, H57, L25

Suggested Citation

Denes, Matthew and Duchin, Ran and Hackney, John, Does Size Matter? The Real Effects of Subsidizing Small Firms (June 5, 2023). Available at SSRN: https://ssrn.com/abstract=3451424 or http://dx.doi.org/10.2139/ssrn.3451424

Matthew Denes (Contact Author)

Carnegie Mellon University - Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

HOME PAGE: http://sites.google.com/site/matthewdenes

Ran Duchin

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

John Hackney

University of South Carolina - Department of Finance ( email )

1014 Greene Street
Columbia, SC 29208
United States

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