Does Size Matter? The Real Effects of Subsidizing Small Firms

Size standards determine small firms’ eligibility for U.S. government subsidies. We estimate the economic effects of access to these subsidies by exploiting randomness in the timing of size standard changes across industries surrounding the Small Business Jobs Act of 2010. We find that size standards have increased considerably over the past decade, leading to the crowding out of the smallest firms, as reflected by lower shares of small businesses in employment and payroll. Consequently, overall employment growth decreases, wages drop, and displaced workers become unemployed. We provide micro-level evidence on subsidy reallocation to larger firms in procurement and loan programs.