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Entrepreneurship and Economic Growth: The Proof Is in the Productivity

Popular and policy discussions have focused extensively on "entrepreneurship." While entrepreneurship is often viewed from the perspective of the individual's benefits--an increase in standard of living, flexibility in hours, and so forth--much of the policy interest derives from the presumption that entrepeneurs provide economy-wide benefits in the form of new products, lower prices, innovations, and increased productivity. How large are these effects? Using a rich panel of state-level data, we quantify the relationship between productivity growth--by state and by industry--and entrepreneurship. Specifically, we use state-of-the-art econometric techniques for panel data to determine whether variations in the birth rate and death rate for firms are related to increases in productivity. We find that shocks to productivity are quite persistent. Thus, to the extent that policies directly raise labor productivity, these effects will be long lasting. In addition, the data reveal that increases in the birth rate of firms lead, after some lag, to higher levels of productivity, a relationship reminiscent of Schumpeterian creative destruction. Given previous evidence that government policies raise the rate of entry of new entrepreneurs, our findings link these policies to enhanced productivity.

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Paper provided by Center for Policy Research, Maxwell School, Syracuse University in its series Center for Policy Research Working Papers with number 50.

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Length: 33 pages
Date of creation: Feb 2003
Date of revision:
Handle: RePEc:max:cprwps:50
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  1. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
  2. Richard Blundell & Stephen Bond, 2000. "GMM Estimation with persistent panel data: an application to production functions," Econometric Reviews, Taylor & Francis Journals, vol. 19(3), pages 321-340.
  3. Douglas Holtz-Eakin & David Joulfaian & Harvey Rosen, 1993. "Sticking It Out: Entrepreneurial Survival and Liquidity Constraints," Working Papers 698, Princeton University, Department of Economics, Industrial Relations Section..
  4. Douglas Holtz-Eakin & David Joulfaian & Harvey Rosen, 1992. "Entrepreneurial Decisions and Liquidity Constraints," Working Papers 679, Princeton University, Department of Economics, Industrial Relations Section..
  5. Alonso-Borrego, Cesar & Arellano, Manuel, 1999. "Symmetrically Normalized Instrumental-Variable Estimation Using Panel Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(1), pages 36-49, January.
  6. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, vol. 56(6), pages 1371-95, November.
  7. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  8. Donald W.K. Andrews, 1988. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Cowles Foundation Discussion Papers 877R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1989.
  9. Ahn, Seung C. & Schmidt, Peter, 1995. "Efficient estimation of models for dynamic panel data," Journal of Econometrics, Elsevier, vol. 68(1), pages 5-27, July.
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