Creating a policy environment for entrepreneurs.

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Creating a policy environment for entrepreneurs.

Entrepreneurship is often viewed as a catalyst for economic growth. Through innovation, hard work, and a willingness to accept financial risk, the entrepreneur takes advantage of previously undiscovered opportunities for arbitrage and profit (Kirzner 1997). (1) This quest for profit, and the possibility of personal and financial failure, aid in ensuring that an economy's resources are used efficiently. Successful entrepreneurs provide employment opportunities to others, generate innovation, spur economic growth, and contribute to state and local governments in the form of tax revenue (Gwartney, Holcombe, and Lawson 2004; Kreft and Sobel 2005). Because of this perception of the benefits generated by entrepreneurship, a large literature has focused on the factors that influence the decision of an individual to become an entrepreneur and the conditions under which entrepreneurship prospers.

Previous research on entrepreneurship has examined the roles of various demographic, human capital, and financial considerations in the decision to become an entrepreneur. Rees and Shah (1986), Gill (1988), and Hamilton (2000) stressed the importance of the earnings differential between entrepreneurship and paid employment. Liquidity constraints on entrepreneurship were addressed by Evans and Jovanovic (1989), Evans and Leighton (1989), and Holtz-Eakin, Joulfaian, and Rosen (1994a, 1994b). Personal and job satisfaction differentials between entrepreneurship and paid employment have been addressed in Taylor (1996), Blanchflower and Oswald (1998), and Blanchflower (2000). In addition, Blanchflower, Oswald, and Stutzer (2001), Georgellis and Wall (2000a), and Beugelsdijk and Noorderhaven (2004) examined the importance of social factors, or latent entrepreneurship, in explaining differences in entrepreneurship across countries and regions, respectively.

This article examines the influence of government policy on rates of entrepreneurship across U.S. states, a topic that has been receiving increasing attention. Recent research has explored the influence of several state-level policies on entrepreneurship, such as personal income tax rates, bank deregulation, and bankruptcy laws. (2) We extend this literature by considering other policies, such as corporate income tax rates and state minimum wages. Furthermore, the flexibility of our empirical model accounts for potential nonlinearities between the policy variables and the rate of entrepreneurship in a state.

We obtain estimates of the effects of government policies on entrepreneurship by ex...

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