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Expectations versus Reality in Business Formation

Author

Listed:
  • Emin Dinlersoz
  • Yueyuan Ma

Abstract

Using administrative data on 17 million U.S. business applications linked to outcomes, we compare potential entrants’ expectations about employer entry and first-year employment with realizations. On average, applicants overestimate employment, mainly because many expect to enter but do not. Among those who expect and achieve entry, employment is typically underestimated. Expected employment predicts entry and realized employment, but conditional on entry realized employment rises less than one-for-one with expectations. Expectation errors are highly heterogeneous and systematically related to application characteristics and local economic conditions, and they predict near-term employment outcomes. A parsimonious model with heterogeneous priors, learning, and pre-entry selection rationalizes these patterns.

Suggested Citation

  • Emin Dinlersoz & Yueyuan Ma, 2026. "Expectations versus Reality in Business Formation," Working Papers 26-11, Center for Economic Studies, U.S. Census Bureau.
    • Handle: RePEc:cen:wpaper:26-11
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    File URL: https://www2.census.gov/library/working-papers/2026/adrm/ces/CES-WP-26-11.pdf
    File Function: First version, 2026
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    More about this item

    Keywords

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    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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