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ABSTRACT. We use a newly developed freedom index by Ruger and Sorens (2009, 2011) to examine the effect of freedom on entrepreneurship. One advantage of using this new index is that it is the first of its kind to include measures of both personal and economic freedom. This allows testing which specific type of freedom is more important for entrepreneurial growth. We find that the aggregate effect of freedom on entrepreneurial activity is positive and significant. Once we decompose the index, however, we discover that what drives this relationship is economic freedom. Our analysis suggests that an increase of one standard deviation in the economic freedom index of a state is associated with over 100 new business starts every month for every 100,000 residents. Finally, by further decomposing the index, we find that only fiscal policy has a significant effect on entrepreneurship. This suggests that policies related to government spending and taxation can influence the allocation of entrepreneurial talent more than policies related to regulation. pp. 88–103

Keywords: institutions, economic freedom, entrepreneur, entrepreneurship
JEL Codes: D020, L260, R110

Joshua C. Hall
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Department of Economics, Beloit College
Boris Nikolaev
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University of South Florida
John M. Pulito
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George Mason University
Benjamin J. VanMetre
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Illinois Policy Institute

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