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

115 Pages Posted: 31 Aug 2020 Last revised: 30 Apr 2023

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 Toronto, Rotman School of Management

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.

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 Toronto, Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://https://sites.google.com/site/tingxu4

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