The effect of U.S. state government policies on entrepreneurship

This study analyses the effect of U.S. state Government policies on new firm creation.  We analyze a panel dataset on 50 states from 1983 to 2008.  Our dependent variable is the number of new establishments, which serves as an indicator of a fertile entrepreneurial ground.  We obtain those measures from the Census Business Dynamics Statistics.  We examine three measures of business creation in each state: establishment entry rate calculated by taking nominal establishment rate and dividing it by an average of establishments in time period t and t-1, net entry rate created by taking same period entry rate and subtracting exit rates, and lagged net entry created by subtracting previous period exit rate from current entry rate.  One of our independent variables of interest is the Economic Freedom of North America (EFNA) index, published by the Frasier Institute.  Another variable of interest is the state and local tax burden, and we use an index from the Tax Foundation as a measure of that burden.  The other independent variables that we include are the unemployment rate, annual population growth, annual growth of real GDP per capita, population density, annual median housing value, and annual percentage of population over the age of 25 with at least a bachelor’s degree.  Given endogeneity concerns, we decide to reject fixed-effect panel regression in favor of Arellano-Bover /Blundell-Bond model which allows endogenous covariates.  We find that economic freedom is positively and robustly correlated to firm creation, which is different from the most similar literature.  However, we find that tax burden does not have a robust relationship with firm creation.