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Too much of a good thing? The macro implications of massive firm entry

Author

Listed:
  • Sam Desiere

    (Ghent University)

  • Tiziano Toniolo

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

  • Gert Bijnens

    (National Bank of Belgium)

Abstract

Policies supporting small businesses are popular among policymakers but often criticised by economists for their potential to distort the economy. This paper provides a comprehensive evaluation of a unique policy that subsidises the first employee. Empirically, we find that the policy led to a surge in the number of firms employing exactly one employee, without a noticeable effect on the number of firms with two or more employees. A simple frictionless general equilibrium model of occupational choices predicts the empirical facts remarkably well. Leveraging our model, we show that the general equilibrium effects on wages and aggregate output are likely to be small. However, the policy is expensive. Our findings support the traditional view that size-dependent subsidies distort the optimal allocation of resources.

Suggested Citation

  • Sam Desiere & Tiziano Toniolo & Gert Bijnens, 2025. "Too much of a good thing? The macro implications of massive firm entry," LIDAM Discussion Papers IRES 2025005, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    • Handle: RePEc:ctl:louvir:2025005
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    File URL: https://sites.uclouvain.be/econ/DP/IRES/2025005.pdf
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    More about this item

    Keywords

    size-dependent policies; firm entry; small firms; wage subsidies; payroll taxes;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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