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

Matthew R. Denes, Sabrina T. Howell, Filippo Mezzanotti, Xinxin Wang and Ting Xu

No 27751, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G0 G14 G28 H0 H25 O3 (search for similar items in EconPapers)
Date: 2020-08
New Economics Papers: this item is included in nep-cfn, nep-ent, nep-pbe, nep-pub, nep-sbm and nep-tid
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Published as MATTHEW DENES & SABRINA T. HOWELL & FILIPPO MEZZANOTTI & XINXIN WANG & TING XU, 2023. "Investor Tax Credits and Entrepreneurship: Evidence from U.S. States," The Journal of Finance, vol 78(5), pages 2621-2671.

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