In this paper, we study the selection process and incentives of ﬁrms that apply for and eventually receive one or multiple governmental grants intended to stimulate innovation and growth in supported ﬁrms. The analysis departs from a rent-seeking model of heterogeneous entrepreneurs who are free to allocate their effort between production and rent-seeking. In equilibrium, highly productive entrepreneurs choose not to enter the rent-seeking contest altogether, and moderately productive entrepreneurs allocate a share of their effort both to rent-seeking and production, whereas low-productivity entrepreneurs are incentivized to allocate most, if not all, of their effort to seeking grants and can thus be called subsidy entrepreneurs. These ﬁrms also have a higher probability of receiving grants. Using detailed data over all grants administered by the three largest grant distributing agencies in Sweden, the empirical analysis suggests that supported ﬁrms tend to have relatively low productivity, higher wages, and a larger share of workers with higher education than do non-supported ﬁrms. These characteristics become more pronounced as we move from single to multiple supported ﬁrms, thus supporting the notion of subsidy entrepreneurs.
Gustafsson, A, Gustavsson Tingvall, P, Halvarsson, D. (2017). Subsidy Entrepreneurs. Ratio Working Paper No. 303. Stockholm: Ratio.