Market failure and the estimation of subsidy size in a regional entrepreneurship programme

Capital subsidy programmes aimed at small businesses attempt to compensate for market failures that exist in the conventional financing markets. The existence of these market failures means that some small firms can be denied access to credit despite the fact that they have viable business projects. This rejection occurs because the ‘risk profile’ of the small business is likely to be weighted by factors other than project viability such as ownership structure, business experience and location of the firm. Information on firms with these characteristics is often limited and thus they are overlooked by otherwise well-functioning credit markets. This paper presents an empirical examination of the subsidy embodied in a capital assistance programme that addresses this situation. Data are analysed pertaining to nearly 500 loans and loan guarantees authorized for small businesses in peripheral regions in Israel over the period 1993--95. The gross size of the subsidy embodied in the programme is calculated and a methodology is presented. Employment impacts of the programme are also presented. On this basis, the magnitude of the subsidy-per-job is estimated and the implications of this kind of programme for increasing regional welfare are discussed.