Does Size Matter? The Real Effects of Subsidizing Small Firms
We employ a new empirical approach to estimate the economic effects of small business subsidies in the United States. The analyses focus on changes in industry size standards, which determine small firms’ eligibility for federal subsidies, and exploit randomness in the timing of size standard changes across industries surrounding the Small Business Jobs Act of 2010. We find considerable increases in industry size standards that lead to the crowding out of small firms, as reflected by lower shares of small businesses in establishments and employment of affected industries. Consequently, expansions decline and contractions rise for small firms and within an industry. We show that employment growth decreases, wages drop, and displaced workers become unemployed. These effects are amplified in areas reliant on small firms. We also find substantial declines in the supply of government subsidies, such as procurement contracts and guaranteed credit, to the smallest firms in an industry. Overall, we provide causal estimates that small business subsidies support economic growth.