Does Size Matter? The Real Effects of Subsidizing Small Firms
63 Pages Posted: 10 Sep 2019 Last revised: 5 Jun 2023
Date Written: June 5, 2023
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
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