Crowding-In or Crowding-Out? How Subsidies Signal the Path to Financial Independence of Social Enterprises

Patrick Reichert, Marek Hudon, Ariane Szafarz and Robert K. Christensen

No 21-014, Working Papers CEB from ULB -- Universite Libre de Bruxelles

Abstract: In today’s multisector configurations, there is little clarity about whether and how public and private subsidies influence social enterprises’ pursuit of financial stability. We address the strategic role of donors in the social-business life cycle whereby social enterprise start-ups rely on subsidies, while mature social enterprises strive for independence from donors. To address the “missing middle,” we develop a typology of subsidy instruments and an intermediary signaling model to clarify how subsidies shape the evolution of outcomes for social enterprises. We argue that source variation matters for certain instruments like corporate intangibles and governmentally subsidized credit guarantees, which trigger crowding-in effects and attract commercial partners, while preventing perverse crowding-out effects, such as soft budget constraints. To illustrate this commercialization story, we draw upon a microfinance case study, demonstrating how public and private donors can induce crowding-in and crowding-out effects. In short, our subsidy typology helps unpack the signals that public and private subsidies send to commercial funders of social enterprises and how they shape the path to future financial independence.

Keywords: Subsidy; Crowding-in; Crowding-out; Signaling theory; Resource acquisition; Social finance (search for similar items in EconPapers)
JEL-codes: G21 G23 H81 H83 M14 M16 (search for similar items in EconPapers)
Date: 2021-08-10
New Economics Papers: this item is included in nep-cwa, nep-isf and nep-mfd
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Citations: View citations in EconPapers (1)

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