Economic freedom and startup formation
Publication id: shakya-2021-economic-freedom-startups
Status: verified
Citation: Shakya, S., & Plemmons, A. (2021). The impact of economic freedom on startups. Journal of Regional Analysis and Policy. Download PDF
Facts¶
Policy hook¶
Economic freedom influences entrepreneurship, but prior studies showed only correlations. Which specific dimensions of economic freedom—regulatory, tax, or spending—actually causally increase new business formation?
Main finding¶
Regulatory freedom significantly increases startup density, while increases in government spending and tax freedom actually decrease startup formation, revealing that business deregulation drives entrepreneurship.
Data and setting¶
U.S. data 2005-2015 using Kauffman Startup Activities Index (startup density: firms under one year old employing workers) and Economic Freedom of North America index.
Research design (plain language)¶
Post-double-selection LASSO methodology identified causal effects among multiple dimensions of economic freedom while controlling for relevant covariates.
One caveat¶
Analysis focuses on startup density but does not measure startup quality, survival rates, or employment creation by new ventures.
PDF or DOI¶
Why it matters¶
Entrepreneurship is central to prosperity. This paper shows that the specific dimensions of economic freedom matter—deregulation drives startups, but high taxes and large government spending actually reduce new business formation. For policymakers seeking to boost entrepreneurship, the finding narrows the target: focus on regulatory barriers (licensing, permitting, compliance costs), not just general “pro-business” rhetoric. The result complicates libertarian arguments that all government spending reduces enterprise; the mechanism is more specific. For states and municipalities competing on business climate, the paper suggests that startup-friendly policy means low regulatory burden plus competitive tax treatment, even if overall government spending is high (since some spending may support infrastructure or stability startups need). The null effect of tax freedom alone is also noteworthy: very low taxes without regulatory relief don’t translate to startup booms. This implies that regulatory burden is the primary bottleneck for new firm entry.