Too much of a good thing? The macro implications of massive firm entry

Sam Desiere (), Tiziano Toniolo () and Gert.bijnens@nbb.be ()
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Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: Policies supporting small businesses are popular among policymakers but often criticised by economists for their potential to distort the economy. This paper provides a comprehensive evaluation of a unique policy that subsidises the first employee. Empirically, we find that the policy led to a surge in the number of firms employing exactly one employee, without a noticeable effect on the number of firms with two or more employees. A simple frictionless general equilibrium model of occupational choices predicts the empirical facts remarkably well. Leveraging our model, we show that the general equilibrium effects on wages and aggregate output are likely to be small. However, the policy is expensive. Our findings support the traditional view that size-dependent subsidies distort the optimal allocation of resources.

Keywords: size-dependent policies; firm entry; small firms; wage subsidies; payroll taxes (search for similar items in EconPapers)
JEL-codes: D22 H25 J08 L25 L26 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2025-03
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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:25/1112

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