The Impact of Economic Freedom on Startups

The decision to start an entrepreneurial activity largely depends upon an entrepreneur's institutional setting. Economic freedom is a widely used measure of institutional quality. Ample studies and a positive association between economic freedom and entrepreneurship; however, these studies have been limited to finding correlative relationships and have not determined a consistent set of relevant covariates. In this paper, startup density, provided by the Kauman Startup Activities Index, proxies startup entrepreneurship while the Economic Freedom of North America index proxies economic freedom. This paper provides causal insights into economic freedom and entrepreneurship in the United States from 2005 to 2015 using a post-double-selection LASSO method. We and that increases in regulatory freedom are likely to cause significant increases in startup density of entrepreneurial activities. In contrast, increases in freedoms of government spending and taxes cause decreases in startup density.