Investor Tax Credits and Entrepreneurship: Evidence from U.S. States
74 Pages Posted: 8 May 2020
Date Written: May 1, 2020
Previous versions are available at: https://ssrn.com/abstract=3454633 and https://ssrn.com/abstract=3471454.
Angel investor tax credits are commonly used around the world to spur entrepreneurship. Exploiting the staggered implementation of these tax credits in 31 U.S. states, we find that while they increase angel investment, marginal investments flow to relatively low-growth firms. Tax credits induce entry by non-professional, inexperienced investors, and are often received by firm insiders. Consistent with these findings, we show that angel tax credits have no significant effect on state-level entrepreneurial activity or on beneficiary firm outcomes relative to failed applicants. Overall, the results raise concerns about whether investor tax credits achieve their stated goal of promoting high-growth entrepreneurship.
Keywords: entrepreneurship, investor tax credit, angel financing, government subsidy
JEL Classification: E24, G24, H71, L26
Suggested Citation: Suggested Citation