Investor Tax Credits and Entrepreneurship: Evidence from U.S. States

114 Pages Posted: 8 May 2020 Last revised: 8 Oct 2021

See all articles by Matthew Denes

Matthew Denes

Carnegie Mellon University - Tepper School of Business

Sabrina T Howell

New York University (NYU) - Leonard N. Stern School of Business; National Bureau of Economic Research (NBER)

Filippo Mezzanotti

Kellogg School of Management - Department of Finance

Xinxin Wang

UCLA Anderson School of Management

Ting Xu

University of Virginia - Darden School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: October 8, 2021

Abstract

Abstract Angel investor tax credits are used globally to spur high-growth entrepreneurship. Exploiting their staggered implementation in 31 U.S. states, we find that they increase angel investment yet have no significant impact on entrepreneurial activity. Two mechanisms explain these results: Crowding out of alternative financing and low sensitivity of professional investors to tax credits. With a large-scale survey and a stylized model, we show that low responsiveness among professional angels may reflect the fat-tailed return distributions that characterize high-growth startups. The results contrast with evidence that direct subsidies to firms have positive effects, raising concerns about promoting entrepreneurship with investor subsidies.

Keywords: entrepreneurship, investor tax credit, angel financing, government subsidy

JEL Classification: E24, G24, H71, L26

Suggested Citation

Denes, Matthew and Howell, Sabrina T and Mezzanotti, Filippo and Wang, Xinxin and Xu, Ting, Investor Tax Credits and Entrepreneurship: Evidence from U.S. States (October 8, 2021). NYU Stern School of Business, Available at SSRN: https://ssrn.com/abstract=3596342 or http://dx.doi.org/10.2139/ssrn.3596342

Matthew Denes (Contact Author)

Carnegie Mellon University - Tepper School of Business ( email )

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Pittsburgh, PA 15213-3890
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HOME PAGE: http://sites.google.com/site/matthewdenes

Sabrina T Howell

New York University (NYU) - Leonard N. Stern School of Business ( email )

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New York, NY NY 10012
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HOME PAGE: http://www.sabrina-howell.com

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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Filippo Mezzanotti

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

Xinxin Wang

UCLA Anderson School of Management ( email )

Los Angeles, CA 90095-1481
United States

HOME PAGE: http://https://sites.google.com/view/xinxinwang

Ting Xu

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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