Targeted State Economic Development Incentives and Entrepreneurship

Abstract

The purpose of this paper is to examine the relationship between state economic development incentives programs and entrepreneurial activity.,The authors use panel data and a fixed-effects model to examine the determinants of five measures of entrepreneurial activity. To measure state economic development incentives programs, they use a new and substantially improved data set from Bartik (2017). They also include a measure for economic freedom, the Fraser Institute’s Economic Freedom of North America index.,The authors find a robustly negative relationship between development incentives and patent activity. They find some evidence that incentives are negatively associated with small business establishments ( 500 employees) share. They also find evidence of a positive relationship between economic freedom and both patent activity and net business formation.,The results imply that economic development incentive programs are unlikely to increase entrepreneurial activity and may decrease it. They also imply increased economic freedom (lower taxes, lower spending, and lower governmental restrictions on labor markets) may increase entrepreneurial activity.,To the authors’ knowledge, this paper provides the first examination of the relationship between development incentives and entrepreneurial activity that utilizes Bartik (2017), a new vastly improved data set of state economic development incentive programs. The paper also contributes to the literature on the relationship between economic freedom and entrepreneurial activity.