Working Paper: CEPR ID: DP1515
Authors: Christian Keuschnigg
Abstract: The paper proposes an intertemporal equilibrium model with monopolistic competition and start-up investment with variable capacity to explain the nexus between business formation and medium-run growth. An investment externality is identified that results in under-accumulation of capital in the decentralized market equilibrium and, thus, creates investment multipliers. Some form of investment promotion is called for. The paper compares the effectiveness of policies to promote small business formation with a general investment tax credit.
Keywords: monopolistic competition; business formation; investment multipliers; underaccumulation of capital
JEL Codes: E62; H23; L16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| business formation (L26) | aggregate investment (E22) |
| investment externalities (D62) | underaccumulation of capital (E22) |
| policies promoting small business formation (L53) | aggregate investment (E22) |
| new businesses (M13) | product diversity (L15) |
| product diversity (L15) | aggregate investment (E22) |
| investment tax credit (H25) | optimal investment outcome (G11) |
| subsidies for small business formation (L26) | inefficient allocation of resources (D61) |