Startups & Solvency: Investigating the Relationship Between State Fiscal Condition and Entrepreneurship in the United States

Abstract

This thesis explores the impact of state fiscal condition on entrepreneurship. The hypothesis says US states that are more fiscally responsible, and therefore have larger ratios of reserves/rainy day funds to expenditures, should have higher percentages of adults starting new businesses, as theoretically these states are more stable and able to fund programs benefiting entrepreneurs. I conducted a quantitative analysis using a Fixed Effects model to determine the relationship between State Fiscal Condition and Entrepreneurship. Ultimately, I found the hypothesis disproven, as there was sufficient evidence to claim a negative correlation between Fiscal Condition and Entrepreneurship with 90% confidence when controlling for Per Capita income, the percent of adults with bachelor’s degrees or higher, and the AFGR, as for every day of increase in the state’s ability to operate, the percent of people who start businesses decreases by 3.31e-6 (with a significance of p-value <0.1). This does not indicate a causal relationship either direction, though I consider several theories for this finding. The R-squared value was very low at 0.020. States are complicated, and therefore I expected a high amount of variance, but the model can still be improved through adding more control variables. The outliers of the regression demonstrated the importance of Industry/Natural Resources and Network Effects on Entrepreneurship. Oil and gas were key to states at the top of the entrepreneurship rankings, and network effects seemed to magnify this result. Investigating several case studies furthered this line of thought, demonstrating the influence of state connections to industry. Policy conclusions included studying entrepreneurship-promoting policies more carefully and spending more liberally in such areas.