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

115 Pages Posted: 31 Aug 2020 Last revised: 17 Oct 2021

See all articles by Matthew Denes

Matthew Denes

Carnegie Mellon University - Tepper School of Business

Sabrina T. Howell

New York University (NYU) - New York University

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: August 2020

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.

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Suggested Citation

Denes, Matthew and T. Howell, Sabrina and Mezzanotti, Filippo and Wang, Xinxin and Xu, Ting, Investor Tax Credits and Entrepreneurship: Evidence from U.S. States (August 2020). NBER Working Paper No. w27751, Available at SSRN: https://ssrn.com/abstract=3683635

Matthew Denes (Contact Author)

Carnegie Mellon University - Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

HOME PAGE: http://sites.google.com/site/matthewdenes

Sabrina T. Howell

New York University (NYU) - New York University

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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