Opportunity entrepreneurship and regulation: a state-level analysis

ABSTRACT

The paper empirically tests the relationship between opportunity entrepreneurship – i.e. procyclical entrepreneurial activity associated with growth-oriented business startups – across states and the relative effect of federal regulation borne by private-sector industries within each state. With entrepreneurial data from the Kauffman Index and a new and plausibly exogenous index of the relative burden imposed by federal regulations on each state between 1998 and 2015, I find a negative and robust association between federal regulation and opportunity entrepreneurship.

KEYWORDS:

• Regulation
• entrepreneurship
• business startups
• firm formation

JEL CLASSIFICATION:

• H72
• H77
• L51

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ In this sense, opportunity entrepreneurship is in many ways akin to Baumol’s (1990) productive entrepreneurship, but somewhat distinct from indirectly productive entrepreneurship (Padilla and Cachanosky 2016), i.e. entrepreneurial activity which itself emerges to reduce inefficiencies created by regulation (though may not be a first-best use of resources), and evasive entrepreneurship (Elert and Henrekson 2016), which can take on characteristics of productive, unproductive, or destructive activity based on a given institutional framework.

² Data are freely available at https://www.kauffman.org/kauffman-index/reporting/startup-activity.

³ A longstanding empirical anomaly tended to find that economic recessions were positively correlated with entrepreneurship (Fairlie and Fossen 2018). This anomaly has since been explained as a distinctive feature between opportunity and necessity entrepreneurship, i.e. opportunity entrepreneurship ultimately results from greater economic and growth opportunities, whereas necessity does not.

⁴ Data and a detailed description are freely accessible at https://quantgov.org/.

⁵ A year is defined as in recession if, based on the NBER’s definition of recession, the US economy was in recession for 6 or more months in a given year. Information on official recession dates are available at https://www.nber.org/cycles.html. Tax burden data are taken from the Tax Foundation’s ‘Annual State-Local Tax Burden Ranking’ which simply calculates the total taxes paid by a state’s residents divided by total income, thus generating the overall tax burden. These data run between 1977 and 2012 and are freely available at https://taxfoundation.org/state-and-local-tax-burdens-historic-data/. GSP data were taken from the Bureau of Economic Analysis, while unionization data come from unionstats.com.

⁶ Specifically, I employ the ‘Size of Government’ sub index from the EFNA. A higher score here would indicate less public-sector involvement in the economy. Data are freely available at https://www.fraserinstitute.org/studies/economic-freedom-of-north-america-2018.