Financing Entrepreneurship: Tax Incentives for Early-Stage Investors
77 Pages Posted: 25 Sep 2019 Last revised: 4 Dec 2019
Date Written: September 1, 2019
Governments often subsidize startups with the goal of spurring entrepreneurship using tax incentives. Exploiting the staggered implementation of angel investor tax credits in 31 U.S. states from 1988 to 2018, we find that these programs increase the number of angel investments and average investment size. However, additional investments flow to lower-quality startups that are launched by less experienced entrepreneurs. Despite short-run propping up due to tax credits, angel-backed firms subsequently perform poorly. We find evidence that entry of new inexperienced investors can explain these results. Overall, our findings suggest that state-level investor tax credits are ineffective in promoting high-quality entrepreneurship.
Keywords: entrepreneurship, investor tax credit, angel financing, government subsidy
JEL Classification: E24, G24, H71, L26
Suggested Citation: Suggested Citation