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Rethinking Credit and Capital Subsidies to Create Jobs Through MSMEs: The Role of Impact Investment Funds

Author

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  • Robalino, David A.

    (World Bank)

  • Bourkane, Loubna

    (African Development Bank)

  • Ben Ghod Bene, Amir

Abstract

The paper discusses the limits of credit and capital subsidies to finance MSMEs in the presence of jobs-related externalities. Using a stylized model of the decision to lend to enterprises with different levels of risk, we show that instruments like credit guarantees are likely to exclude enterprises that have a higher social rate of return and a higher social value than some of those that get access to credit. We also show that pigouvian wage subsidies equal to the value of the jobs externality are unlikely to be an efficient policy instrument; they would need to be firm specific and do not change the distribution of financial risks. We argue that impact investment funds focused on jobs (IIFJ) can be a market mechanism to channel part of existing government subsidies and deal with market failures resulting from both asymmetric information and jobs externalities. Using an extended version of the model that is calibrated to a representative country we show that -- if well designed -- IIFJ can generate significant welfare gains relative to traditional investment funds because of their impact on jobs.

Suggested Citation

  • Robalino, David A. & Bourkane, Loubna & Ben Ghod Bene, Amir, 2025. "Rethinking Credit and Capital Subsidies to Create Jobs Through MSMEs: The Role of Impact Investment Funds," IZA Discussion Papers 18119, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp18119
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    References listed on IDEAS

    as
    1. Berger, Allen N. & Udell, Gregory F., 2006. "A more complete conceptual framework for SME finance," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 2945-2966, November.
    2. Réka Juhász & Nathan Lane & Dani Rodrik, 2024. "The New Economics of Industrial Policy," Annual Review of Economics, Annual Reviews, vol. 16(1), pages 213-242, August.
    3. Lorenzo Casaburi & Jack Willis, 2024. "Value Chain Microfinance," NBER Working Papers 32085, National Bureau of Economic Research, Inc.
    4. Kerwin Kofi Charles & Erik Hurst & Mariel Schwartz, 2019. "The Transformation of Manufacturing and the Decline in US Employment," NBER Macroeconomics Annual, University of Chicago Press, vol. 33(1), pages 307-372.
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    6. Jacob Bastian & Katherine Michelmore, 2018. "The Long-Term Impact of the Earned Income Tax Credit on Children’s Education and Employment Outcomes," Journal of Labor Economics, University of Chicago Press, vol. 36(4), pages 1127-1163.
    7. Robalino, David A. & Romero, Jose M. & Walker, Ian, 2020. "Allocating Subsidies for Private Investments to Maximize Jobs Impacts," IZA Discussion Papers 13373, Institute of Labor Economics (IZA).
    8. Jose Manuel Romero & David Robalino & Ian Walker, 2020. "Allocating Subsidies for Private Investments to Maximize Jobs Impacts," World Bank Publications - Reports 33868, The World Bank Group.
    9. repec:osf:socarx:gsyq4_v1 is not listed on IDEAS
    10. Timothy M. Diette & Arthur H. Goldsmith & Darrick Hamilton & William Darity, 2018. "Race, Unemployment, and Mental Health in the USA: What Can We Infer About the Psychological Cost of the Great Recession Across Racial Groups?," Journal of Economics, Race, and Policy, Springer, vol. 1(2), pages 75-91, September.
    11. Lorenzo Casaburi & Jack Willis, 2024. "Value chain microfinance," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 40(1), pages 160-175.
    12. Robalino, David & Romero, Jose Manuel & Walker, Ian, 2020. "Allocating Subsidies for Private Investments to Maximize Jobs Impacts," Jobs Group Papers, Notes, and Guides 32113476, The World Bank.
    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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