Investor Tax Credits and Entrepreneurship: Evidence from U.S. States

Matthew Denes, Sabrina Howell, Filippo Mezzanotti, Xinxin Wang, and Ting Xu

Angel investor tax credits are used around the world to spur high-growth entrepreneurship. Exploiting the staggered implementation of these tax credits in 31 U.S. states, we find that while they increase angel investment, they have no effect on entrepreneurial activity. They induce entry by inexperienced, local investors and are often used by insiders. A survey of 1,411 angel investors suggests that a “home run” investing approach alongside coordination and information frictions explain low take-up among experienced investors. The results contrast with evidence that direct subsidies to firms have large positive effects, raising concerns about using investor subsidies to promote entrepreneurship.

Working paper.