Institutional Flexibility and Entrepreneurship

This paper addresses a theoretical puzzle regarding how institutions enhance individual entrepreneurial behavior. We leverage a unique research setting to extend institutional theory into the realm of entrepreneurship by introducing and testing the concept of institutional flexibility. More flexible institutions foster entrepreneurship in allowing, rather than restricting individual choices. This paper explores the elimination of a constraint on institutional flexibility – the academic year system – by examining Tsinghua University’s (Beijing) adoption of a more flexible credit system in 1984 as a natural experiment. Using a differences-in-differences approach and controlling for changes in the economy, we find that a shift from rigid to more flexible institutional rules increases entrepreneurial behavior. Furthermore, we find that institutional change is likely to affect different types of individuals in distinct ways, which are consistent with flexibility but not with alternative explanations. The results contribute to the literature on institutional constraints on entrepreneurship while addressing the puzzle of how durable, stable institutions might foster processes of emergence by theorizing how choice can be institutionalized.