Working Paper No. 303: Subsidy Entrepreneurs

Abstract

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.