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Crowding-In or Crowding-Out? How Subsidies Signal the Path to Financial Independence of Social Enterprises

Author

Listed:
  • Patrick Reichert
  • Marek Hudon
  • Ariane Szafarz
  • Robert K. Christensen

Abstract

In today’s multisector configurations, there is little clarity about whether and how public and private subsidies influence social enterprises’ pursuit of financial stability. We address the strategic role of donors in the social-business life cycle whereby social enterprise start-ups rely on subsidies, while mature social enterprises strive for independence from donors. To address the “missing middle,” we develop a typology of subsidy instruments and an intermediary signaling model to clarify how subsidies shape the evolution of outcomes for social enterprises. We argue that source variation matters for certain instruments like corporate intangibles and governmentally subsidized credit guarantees, which trigger crowding-in effects and attract commercial partners, while preventing perverse crowding-out effects, such as soft budget constraints. To illustrate this commercialization story, we draw upon a microfinance case study, demonstrating how public and private donors can induce crowding-in and crowding-out effects. In short, our subsidy typology helps unpack the signals that public and private subsidies send to commercial funders of social enterprises and how they shape the path to future financial independence.

Suggested Citation

  • Patrick Reichert & Marek Hudon & Ariane Szafarz & Robert K. Christensen, 2021. "Crowding-In or Crowding-Out? How Subsidies Signal the Path to Financial Independence of Social Enterprises," Working Papers CEB 21-014, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:sol:wpaper:2013/329773
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    More about this item

    Keywords

    Subsidy; Crowding-in; Crowding-out; Signaling theory; Resource acquisition; Social finance;
    All these keywords.

    JEL classification:

    • H83 - Public Economics - - Miscellaneous Issues - - - Public Administration
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • M16 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - International Business Administration
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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