Subsidizing Business Entry in Competitive Credit Markets

Vincenzo Cuciniello, Claudio Michelacci and Luigi Paciello

Journal of Political Economy, 2025, vol. 133, issue 11, 3652 - 3711

Abstract: We study business creation subsidies in a general equilibrium model where firms are financially constrained upon entry and borrow competitively by issuing long-term debt. If paid out before business formation (ex ante), the subsidy reduces start-ups’ debt and bankruptcy rates; if paid out as a refund of expenditures (ex post), it reduces equity rather than debt, raising bankruptcies among both new and existing firms. In a model calibrated to Southern Italy, the optimal subsidy is paid entirely ex ante, raising welfare by 2% of consumption. If paid ex post, the same subsidy would result in welfare losses.

Date: 2025
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