Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/322364 
Year of Publication: 
2025
Series/Report no.: 
ADB Economics Working Paper Series No. 778
Publisher: 
Asian Development Bank (ADB), Manila
Abstract: 
This paper investigates the unintended consequences of size-dependent regulations in small and medium-sized enterprise (SME) promotion policies. We use data from all registered Thai firms to analyze the effects of introducing a revenue cap in the SME tax incentive program qualification. Our study shows a marked bunching of firms just below the cap, illustrating tax salience. We provide evidence suggesting that the bunching is due to real operation responses. A differencein-differences analysis indicates that eligible firms just under the threshold exhibit a significant decline in revenue growth compared to those just above it. This adverse effect is more pronounced among firms with lower pre-policy profitability. We also document substantial negative effects on investment and profitability but find no significant impact on firm survival- challenging the assertion that government support enhances SME survival. Our findings also indicate a marked reduction in the presence of large firms, suggesting broader implications on firm size distribution in the economy. We highlight the double-edged nature of size-based SME policies: while intended to help smaller businesses, the measures may inadvertently suppress growth for firms near the threshold and potentially create resource misallocation. This study underscores the need for a careful policy design that supports SMEs without impeding their potential for growth.
Subjects: 
size-dependent policy
SMEs
bunching
tax incentives
corporate tax
JEL: 
G3
H2
K3
L2
L5
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Working Paper

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