Investor Tax Credits and Entrepreneurship: Evidence from U.S
Investor Tax Credits and Entrepreneurship: Evidence from U.S. States* Matthew Denes, Sabrina Howell, Filippo Mezzanotti, Xinxin Wang, and Ting Xu† August 2020 Abstract Angel investor tax credits are used around the world to spur high-growth entrepreneurship. Exploiting the staggered implementation of these tax credits in 31 U.S. states, we find that while they increase angel investment, they have no significant effect on entrepreneurial activity. Tax credits induce entry by inexperienced, local investors and are often used by insiders. A survey of 1,411 angel investors suggests that a “home run” investing approach alongside coordination frictions explain low take-up among experienced investors. The results contrast with evidence that direct subsidies to firms have large positive effects, raising concerns about using investor subsidies to promote entrepreneurship. JEL Classification: E24, G24, H71, L26 Keywords: entrepreneurship, investor tax credit, angel financing, government subsidy * This paper subsumes two prior working papers: Denes, Wang, and Xu (2019) and Howell and Mezzanotti (2019). We thank Jim Albertus, Tania Babina, Laurent Bach (discussant), Greg Brown, Jesse Davis, Ryan Decker, Mike Ewens (discussant), Joan Farre-Mensa, Paolo Fulghieri, Andra Ghent, Juanita Gonzales-Uribe (discussant), Will Gornall, Apoorv Gupta, Arpit Gupta, Thomas Hellmann, Yael Hochberg, Yunzhi Hu, Jessica Jeffers (discussant), Simone Lenzu, Josh Lerner, Song Ma, David Matsa, Arnobio Morelix, Holger Mueller, Ramana Nanda, Daniel Paravisini (discussant),
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