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Entrepreneurship, Small Businesses, and Economic Growth in Cities: An Empirical Analysis

Aug 2015
Working Paper
Yong Suk Lee

Does entrepreneurship cause urban economic growth and if so how large is the impact? Empirical analysis of such question is hampered by endogeneity. This paper uses two different sets of variables – the homestead exemption levels in state bankruptcy laws from 1975 and the share of MSA overlaying aquifers - to instrument for entrepreneurship and examine urban growth between 1993 and 2002. Despite using different sets of instrumental variables, the ranges of 2SLS estimates are similar, further supporting the significant impact of entrepreneurship on urban growth. I find that a ten percent increase in the birth of small businesses increases MSA employment by 1.1 to 2.2%, annual payroll by 3.1 to 4.0%, and wages by 1.8 to 2.0% after ten years. Furthermore, an accounting exercise at the MSA level indicates that the employment and payroll growth from entrepreneurship are not confined to the newly created businesses but spillover to the aggregate urban economy.

Publication Keywords: 
Homestead Exemption
Urban Growth
Agglomeration Benefits
Geographic Regions: