Which State Policies Lead to U.S. Firm Exits? Analysis with the Economic Freedom Index

Abstract

This research investigates the relationship between public policy and firm deaths in the U.S. states. Policies that promote firm births may increase or decrease firm deaths. We use components of the Economic Freedom of North America index as a metric to evaluate the relationship between increased government size and firm deaths for the 50 states during 1989–2004. Elements of economic freedom are significantly related to firm deaths but in conflicting directions. We find that in the relevant range, some increases in state policy lead to firm death more than others. The paper also discusses our results and the implications for both future academic research and public policy.

Notes

1 The literature also refers to firm deaths as firm failure, but for the purposes of this study, we will use the term “firm deaths” as that is the term used by the U.S. Bureau of Census.

2 Headd (2003) points out that firm closure differs from firm failure.

Additional information

Notes on contributors

Noel D. Campbell

Noel D. Campbell is Associate Professor of Economics in the Department of Economics, Finance and Insurance and Risk Management at the University of Central Arkansas.

Kirk C. Heriot

Kirk C. Heriot is Assistant Professor of Management in the Turner College of Business at the Columbus State University.

Andres Jauregui

Andres Jauregui is Assistant Professor of Economics in the Department of Accounting and Finance at the Columbus State University.

David T. Mitchell

David T. Mitchell is Assistant Professor in the Department of Economics at the University of South Alabama.