Journal of Political Economy Vol. 133 No. 11 2025
Subsidizing Business Entry in Competitive Credit Markets
Abstract
We study business creation subsidies in a general equilibrium model where firms are financially constrained upon entry and borrow competitively by issuing long-term debt. If paid out before business formation (ex ante), the subsidy reduces start-ups? debt and bankruptcy rates; if paid out as a refund of expenditures (ex post), it reduces equity rather than debt, raising bankruptcies among both new and existing firms. In a model calibrated to Southern Italy, the optimal subsidy is paid entirely ex ante, raising welfare by 2% of consumption. If paid ex post, the same subsidy would result in welfare losses.
- DOI
- 10.1086/737231
- Volume
- 133
- Issue
- 11
- Pages
- 3652-3711
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib