Announcing a Green New Deal: The Role of Policy Signals for Stimulating Entrepreneurship

Policymakers increasingly recognize the potential of creating local industries and jobs around carbon-neutral technologies. In this paper we discuss whether policymakers can use information about green energy policies as a signal to stimulate the foundation of new companies. We explore empirically whether we can identify an impact of policy announcements on entry decision-making of new firms by using new data from the Swiss commercial registry. Our study reveals a significant relationship between information on future policies and firm entries indicating that credible policy announcements can spur new industry development. We then develop a theoretical model to substantiate the link between announcements of myopic governments and firm entry. We consider entrepreneurs investing in fixed costs the period before they produce based on the announced subsidy by the government but payed out in the subsequent period. We can show that governments can use announcements as important information for investment decisions and – as shown in the empirical analysis – foster new firm entries before the policy is in place. We finally discuss to which degree our results hold for a wider range of political institutions and conclude with the some implications for policymakers.