Money for nothing? Evidence on the effects of start-up subsidies on transitions from unemployment to self-employment

Abstract

Start-up subsidies (SUS) aim to foster the transition of unemployed individuals into self-employment by securing their livelihood during the first months after their start-up. While the existing evidence on the effects of SUS on subsidy recipients’ labor market success and business performance is rather positive, much less is known about the degree to which SUS can actually induce additional entrepreneurial activity out of unemployment. Critics suspect that SUS are rather ineffective in increasing transitions from unemployment into self-employment, essentially handing out money for nothing. Exploiting large regional variation caused by a German policy reform at the end of 2011, this paper investigates the role of SUS for transitions from unemployment to self-employment using a difference-in-differences strategy. Results show that the reform led to large negative effects on regional transitions into subsidized as well as overall self-employment. Results imply a prominent role of public policy in shaping start-up activity from unemployment.