Strategically Small Firms and the Real Effects of Public Grants During a Crisis

Abstract

We study whether firms that remain strategically small to avoid size-dependent regulations in normal times disproportionately access public support during the COVID-19 crisis. Using Spanish firm-level data, we identify bunching below two thresholds that introduce increased oversight: €6 million in revenue, where tax compliance and monitoring become stricter, and 50 employees, where labor regulation and disclosure obligations become more demanding. Firms just below these thresholds were more likely to obtain public funding during the crisis than otherwise similar firms just above them. Mechanism tests point away from financing needs and higher credit costs, and instead suggest that strategic avoidance of oversight shaped firms’ take-up of lightly screened public resources. Despite accessing more public resources, strategically small firms invested less and exhibited weaker performance, while reducing short-term debt. Overall, our evidence suggests that size-dependent regulations in normal times and crisis-relief policies can jointly generate unintended effects in the allocation and use of public resources.