Abstract

Recent research has sought to explain variation in rates of entrepreneurship as a function of “economic freedom,” but present non-cumulative, sometimes contradictory findings. These results stem from three issues. First, most studies use cross-sectional data, providing little insight on how the evolution of institutions impact entrepreneurial behavior. Second, many studies suffer from model specification error, using all institutional variables as direct predictors of entrepreneurship, thus eliminating pathdependent or moderating influences. Third, signaling theory suggests that changes in institutional conditions, rather than levels, can lead to changes in inclinations to engage in entrepreneurship. Drawing on economics and Austrian theory, this empirical study proposes a new model and addresses these three issues. We use entrepreneurship activity data from over 60 countries across a ten year time period. Our findings suggest that the better predictors of future entrepreneurial activity are changes in institutional conditions and the strength of influences resulting from confluence among strong institutions.

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