Economic Freedom and Entrepreneurship Rate: Evidence from the U.S. States After the Great Recession

Our paper explores the ability of the state-level economic institutions, i.e., economic freedom and its components, to explain the movements of entrepreneurship rate after the Great Recession. We use panel date from 50 U.S. states during the period (2008–2017). This paper employs three estimators, fixed effect, panel-corrected standard errors method with states dummy variables, and generalized method of moments (GMM) to extract robust results. The results show that the effect of economic factors on the entrepreneurship rate persists more than that of the institutional and profit opportunity factors. Economic freedom, economic development, and firms’ death rate have a statistically positive effect on entrepreneurship activities. However, the unemployment rate and tax regulations have a statistically significant negative effect. This finding implies that in the state of a recession such as the Great Recession, the entrepreneurship activities will deteriorate sharply. In such a case, the economy needs a genuine government intervention to support economic growth, reduce the unemployment rate, and thus enhance the entrepreneurial activities.