Working Paper: NBER ID: w27751
Authors: Matthew R. Denes; Sabrina T. Howell; Filippo Mezzanotti; Xinxin Wang; Ting Xu
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.
Keywords: Angel Investor Tax Credits; Entrepreneurship; Early-Stage Financing; Crowding Out; Investor Behavior
JEL Codes: G0; G14; G28; H0; H25; O3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| angel investor tax credits (G24) | angel investments (G24) |
| angel investor tax credits (G24) | number of individual angel investors (G24) |
| angel investor tax credits (G24) | non-angel early-stage investments (G24) |
| angel investments (G24) | entrepreneurial activity (L26) |
| non-angel early-stage investments (G24) | entrepreneurial activity (L26) |
| angel investments (G24) | high-tech firm entry (L63) |
| angel investments (G24) | job creation (J68) |