Does Size Matter? The Real Effects of Subsidizing Small Firms
53 Pages Posted: 10 Sep 2019 Last revised: 7 Jul 2021
Date Written: July 6, 2021
We employ a new empirical approach to estimate the economic effects of access to small business subsidies in the United States. The analyses focus on changes in industry size standards, which determine small firms’ eligibility for government subsidies, and exploit randomness in the timing of size standard changes across industries surrounding the Small Business Jobs Act of 2010. We find that industry size standards have increased considerably over the past decade, leading to the crowding out of the smallest firms, as reflected by lower shares of small businesses in employment and payroll. Consequently, overall employment growth decreases, wages drop, and displaced workers become unemployed. These effects are amplified in areas reliant on small firms. We examine two programs using size standards as examples of the effects of increases during normal times and crises. Using procurement contracts, we show that government subsidies are reallocated to firms newly classified as small. We also find that larger firms received a greater share of loans during the first round of the Paycheck Protection Program in 2020.
Keywords: government subsidies, small firms, employment, procurement
JEL Classification: E24, G38, H25, H57, L25
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