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Entrepreneurial response to interstate regulatory competition: evidence from a behavioral discrete choice experiment

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Abstract

Despite a developing literature exploring the relationship between regulation, taxation and business startups, few studies have utilized artefactual experimental methods to link the choices made by entrepreneurs to an underlying regulatory framework or tax system. Using information collected from a discrete choice experiment where 182 small business owners and entrepreneurs made eight start-up decisions, we describe the effect of state-level government intervention in terms of an entrepreneur’s choice to start a business. The design allows the generation of data on entrepreneurial choice of institutional setting for new business formation, which are difficult or impossible to observe in natural settings from surveys. We find that over 80% of entrepreneurs are likely to respond adversely to regulatory and tax legislation such as mandatory licensing, income taxes, and time to register a business. Results confirm that, at least in the short run, highly regulated business environments are less likely to foster entrepreneurial market entry. Additionally, a non-trivial fraction of entrepreneurs will choose not to start a new business, even in the presence of low taxation and regulatory burden.

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Notes

  1. Our study of firm location choice is an analysis of institutional, not spatial characteristics of location. Regulatory burdens can be contrasted with the spatial ones which might be explained via Ricardian comparative advantage.

  2. Chirinko and Wilson (2017) attribute the decline in state corporate tax rates over time to synchronous responses among states to common shocks rather than strategic tax competition. Using panel data set covering the 48 contiguous U.S. states for the period 1965 to 2006, they find a negative response of home state to foreign tax policy implying that tax competition may increase the provision of local public goods.

  3. Such financial incentives are often increasing in the size of the investment. In the highly-publicized case of Amazon’s HQ2, cities across the U.S. engaged in fierce competition in the form of tax breaks and incentives to attract a single business promising up to 50,000 jobs. The chosen sites in New York City’s Long Island City, NY and in Arlington, VA “provided total incentives worth $2.8 billion” when other sites in Maryland and Newark, New Jersey offered $8.5 and $7 billion, respectively. Such incentives imply a substantial cash transfer to new businesses: “The bulk of Virginia's tax incentives come in the form of a cash grant of $22,000 for each job added over the next 12 years, as long as the average annual wage of those jobs is at least $150,000—a total of $550 million if Amazon adds the 25,000 jobs it says it will.” https://www.cnn.com/2018/11/13/business/amazon-hq2-subsidies/index.html.

  4. Following the typology of field experiments in Harrison and List (2004), the design could alternatively be termed an artefactual field experiment.

  5. See Carruthers and Lamoreaux (2016) for a review of the literature on interstate regulatory competition. Notably, their review does not include any experiments.

  6. See Hsu et al. (2017) for a thorough description of experiments in entrepreneurship research.

  7. While SAS® provides additional procedures for more complicated experimental designs, other programs such as Ngene® are also commonly employed for the most complex designs.

  8. Estimated relative to a baseline of 4% in Kansas and 6.25% in Missouri.

  9. Estimated relative to 5.6 days, as it is the number of registration days reported by Teague (2016).

  10. The elasticities we computed are arc elasticities or mid-point elasticities, where we are using the average of the pre- and post-policy change values as opposed to a single point along entrepreneurs’ choice set..

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Acknowledgements

Funding for the study was provided by the Institute for the Study of Free Enterprise at Oklahoma State University.

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Authors and Affiliations

  1. Department of Agricultural, Food, and Resource Economics, Michigan State University, East Lansing, USA

    Trey Malone

  2. Department of Social Sciences, University of Michigan-Dearborn, Dearborn, USA

    Antonios M. Koumpias

  3. School of Entrepreneurship, Oklahoma State University, Stillwater, USA

    Per L. Bylund

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  1. Trey Malone
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Malone, T., Koumpias, A.M. & Bylund, P.L. Entrepreneurial response to interstate regulatory competition: evidence from a behavioral discrete choice experiment. J Regul Econ 55, 172–192 (2019). https://doi.org/10.1007/s11149-019-09375-y

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