Abstract

Where an entrepreneur chooses to start their business will impact customer convenience (if it is an actual storefront), their access to human capital and knowledge, as well as the tax and regulatory burden that they will face (Carlton, 1983; Zucker, et al., 1998). This paper attempts to answer the following research questions: How do the regulatory and tax burdens of states and counties influence where entrepreneurs chose to locate? And how do these factors influence failure?

Generally, we expect that in areas where fixed institutional costs are low, entrepreneurs will be more likely to make Type I errors in that they will start firms with lower expected returns than will entrepreneurs in areas where the fixed institutional costs are higher. Entrepreneurs in high fixed institutional cost areas will commit type II errors and be less likely to open firms that could be successful since they will require higher returns to make the fixed cost investments. Thus there will be fewer firm births in areas with high fixed institutional costs, but also fewer firm deaths.

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