Investor Tax Credits and Entrepreneurship: Evidence from U.S. States
85 Pages Posted: 8 May 2020 Last revised: 10 Sep 2020
Date Written: August 20, 2020
Angel investor tax credits are used globally to spur high-growth entrepreneurship. Exploiting the staggered implementation of these tax credits in 31 U.S. states, we find that while they increase angel investment, they have no significant effect on entrepreneurial activity. Tax credits induce entry by inexperienced, local investors and are often used by insiders. A survey of 1,411 angel investors suggests that a “home run” investing approach alongside coordination and information frictions explain low take-up among experienced investors. The results contrast with evidence that direct subsidies to firms have large positive effects, raising concerns about using investor subsidies to promote entrepreneurship.
Keywords: entrepreneurship, investor tax credit, angel financing, government subsidy
JEL Classification: E24, G24, H71, L26
Suggested Citation: Suggested Citation