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The Effect of Personal and Economic Freedom on Entrepreneurial Activity: Evidence from a New State Level Freedom Index

The Effect of Personal and Economic Freedom on Entrepreneurial Activity: Evidence from a New... We use a newly developed freedom index by Ruger and Sorens (2009, 2011) to examine the effect of freedom on entrepreneurship. One advantage of using this new index is that it is the first of its kind to include measures of both personal and economic freedom. This allows testing which specific type of freedom is more important for entrepreneurial growth. We find that the aggregate effect of freedom on entrepreneurial activity is positive and significant. Once we decompose the index, however, we discover that what drives this relationship is economic freedom. Our analysis suggests that an increase of one standard deviation in the economic freedom index of a state is associated with over 100 new business starts every month for every 100,000 residents. Finally, by further decomposing the index, we find that only fiscal policy has a significant effect on entrepreneurship. This suggests that policies related to government spending and taxation can influence the allocation of entrepreneurial talent more than policies related to regulation. Keywords: Institutions, Economic Freedom, Entrepreneur, Entrepreneurship http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Journal of Entrepreneurship Addleton Academic Publishers

The Effect of Personal and Economic Freedom on Entrepreneurial Activity: Evidence from a New State Level Freedom Index

American Journal of Entrepreneurship , Volume 6 (1): 16 – Jan 1, 2013

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Publisher
Addleton Academic Publishers
Copyright
© 2009 Addleton Academic Publishers
ISSN
2164-9685
Publisher site
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Abstract

We use a newly developed freedom index by Ruger and Sorens (2009, 2011) to examine the effect of freedom on entrepreneurship. One advantage of using this new index is that it is the first of its kind to include measures of both personal and economic freedom. This allows testing which specific type of freedom is more important for entrepreneurial growth. We find that the aggregate effect of freedom on entrepreneurial activity is positive and significant. Once we decompose the index, however, we discover that what drives this relationship is economic freedom. Our analysis suggests that an increase of one standard deviation in the economic freedom index of a state is associated with over 100 new business starts every month for every 100,000 residents. Finally, by further decomposing the index, we find that only fiscal policy has a significant effect on entrepreneurship. This suggests that policies related to government spending and taxation can influence the allocation of entrepreneurial talent more than policies related to regulation. Keywords: Institutions, Economic Freedom, Entrepreneur, Entrepreneurship

Journal

American Journal of EntrepreneurshipAddleton Academic Publishers

Published: Jan 1, 2013

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