Entrepreneurship and Economic Growth Conference Fall 2016

Why do people become entrepreneurs? Evidence of low returns to entrepreneurship is puzzling. Cognitive biases like overconfidence or nonpecuniary benefits may explain why people start firms. An alternative view emphasizes the real option value of launching or abandoning a new firm, and characterizes entrepreneurship as rational experimentation. These perspectives have different predictions for whether and how entrepreneurs learn from new information; in the experimentation view, founders should be more responsive to new information. Howell uses novel data from nearly 100 new venture competitions to show that negative feedback increases the chances a venture is abandoned. Further, learning in the sense of improvement is predictive of subsequent financing and employment. Howell finds heterogeneity that is relevant to understanding innovation and firm dynamics. The cost of experimentation, the stage of the venture and its founder in their respective lifecycles, geography, and the founder’s personal background are all important determinants of learning. The results are broadly consistent with the experimentation view. However, founders with degrees from elite schools and social impact ventures are unresponsive to feedback and may, respectively, be overconfident and garner large non-pecuniary benefits.

Burchardi, Chaney, and Hassan use 130 years of data on historical migrations to the United States to show a causal effect of the ancestry composition of U.S. counties on foreign direct investment (FDI) sent and received by local firms. To isolate the causal effect of ancestry on FDI, the researchers build a simple reduced-form model of migrations: migrations from a foreign country to a U.S. county at a given time depend on (i) a push factor, causing emigration from that foreign country to the entire United States, and (ii) a pull factor, causing immigration from all origins into that U.S. county. The interaction between time-series variation in origin-specific push factors and destination-specific pull factors generates quasi-random variation in the allocation of migrants across U.S. counties. The researchers find that a doubling of the number of residents with ancestry from a given foreign country relative to the mean increases by 4 percentage points the probability that at least one local firm engages in FDI with that country, and increases by 29% the number of employees at domestic recipients of FDI from that country. This effect operates mainly through the descendants of migrants rather than migrants themselves and increases in size with the ethnic diversity of the local population, the distance to the origin country, and the quality of its institutions.

Abstract
Entrepreneurship plays an important role in labor markets, productivity growth, and
occuational choices. While a large and growing literature studies patterns in entrepreneurial
activity in the U.S., there exists little well-identified research into the policy determinants of entrepreneurial outcomes and the differing effects of policies on firms of different
ages. Using the recently developed Quarterly Workforce Indicators dataset, we consider
three state-level policies--corporate income taxes, minimum wages, and personal income
taxes--and study their effects on new firm activity by comparing continuguous counties
that lie across state borders. We estimate the effect of changes in these policies on employment and job flows at new firms. We find significant negative effects of corporate
tax increases on the level of entrepreneurial activity, and we find that new firms account
for a disproportionate share of the response of aggregate employment growth to such tax
changes. The effects of minimum wages are of moderate size but largely dissipate after
accounting for cross border spillovers. Finally, we find no statistically significant impact
of personal tax rates.

We thank Manuel Adelino, David Robinson, Tim Dunne, Xavier Giroud and participants at the NBER Entrepreneurship and Economic Growth pre-conference for helpful comments and discussions. We also thank
Morgan Smith and Emily Wisniewski, for excellent research assistance. Computing resources were provided by
Cornell's Social Science Gateway which is supported through NSF grant #1042181 and the Distributed Environment for Academic Computing (DEAC) at Wake Forest University.

1

In 2011, the federal government accelerated payments to their small business contractors, spanning virtually every county and industry in the US. Barrot and Nanda study the impact of this reform on county-sector employment growth over the subsequent three years. Despite firms being paid just 15 days sooner, the researchers find payroll increased 10 cents for each accelerated dollar, with two-thirds of the effect coming from an increase in new hires and the balance from an increase in earnings. Importantly, however, the researchers document substantial crowding out of non-treated firms employment, particularly in counties with low rates of unemployment. Their results highlight an important channel through which financing constraints can be alleviated for small firms, but also emphasize the general-equilibrium effects of large-scale interventions, which can lead to a substantially lower net impact on aggregate outcomes.