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Subsidy Entrepreneurs

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In this paper, we study the selection process and incentives of firms that apply for and eventually receive one or multiple governmental grants intended to stimulate innovation and growth in supported firms. The analysis departs from a rent-seeking model of heterogeneous entrepreneurs who are free to allocate their effort between production and rent-seeking. In equilibrium, highly productive entrepreneurs choose not to enter the rent-seeking contest altogether, and moderately productive entrepreneurs allocate a share of their effort both to rent-seeking and production, whereas low-productivity entrepreneurs are incentivized to allocate most, if not all, of their effort to seeking grants and can thus be called subsidy entrepreneurs. These firms also have a higher probability of receiving grants. Using detailed data over all grants administered by the three largest grant distributing agencies in Sweden, the empirical analysis suggests that supported firms tend to have relatively low productivity, higher wages, and a larger share of workers with higher education than do non-supported firms. These characteristics become more pronounced as we move from single to multiple supported firms, thus supporting the notion of subsidy entrepreneurs.

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  • Gustafsson, Anders & Gustavsson Tingvall, Patrik & Halvarsson, Daniel, 2017. "Subsidy Entrepreneurs," Ratio Working Papers 303, The Ratio Institute.
    • Handle: RePEc:hhs:ratioi:0303
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    Cited by:

    1. Martin Thomas Falk & Roger Svensson, 0. "Evaluation criteria versus firm characteristics as determinants of public R&D funding," Science and Public Policy, Oxford University Press, vol. 47(4), pages 525-535.
    2. Nils Karlson & Christian Sandström & Karl Wennberg, 2021. "Bureaucrats or Markets in Innovation Policy? – a critique of the entrepreneurial state," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 34(1), pages 81-95, March.
    3. David S. Lucas & Caleb S. Fuller & Ennio E. Piano & Christopher J. Coyne, 2018. "Visions of entrepreneurship policy," Journal of Entrepreneurship and Public Policy, Emerald Group Publishing Limited, vol. 7(4), pages 336-356, November.
    4. Shelby Solomon & Joshua S. Bendickson & Eric W. Liguori & Matthew R. Marvel, 2022. "The effects of social spending on entrepreneurship in developed nations," Small Business Economics, Springer, vol. 58(3), pages 1595-1607, March.
    5. Niklas Elert & Magnus Henrekson, 2019. "The collaborative innovation bloc: A reply to our commentators," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 32(4), pages 349-361, December.
    6. Kärnä, Anders & Karlsson, Johan & Engberg, Erik & Svensson, Peter, 2020. "Political Failure: A Missing Piece in Innovation Policy Analysis," Working Paper Series 1334, Research Institute of Industrial Economics, revised 21 Apr 2022.

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    More about this item

    Keywords

    Rent-seeking; Firm subsidies; R&D grants; Industrial policy;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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