Economic Freedom, Entrepreneurship, Income Levels: Some Us State-Level Empirics

Recent literatures on entrepreneurship and economic growth estimate the empirical relationships between the following pairs of variables: (1) institutions and entrepreneurial activity; (2) institutions and economic growth; and (3) entrepreneurship and economic growth. This paper revisits each of these relationships using US state-level real GDP per capita, the Economic Freedom of North America index, and the state-level productive and unproductive entrepreneurship scores provided by Sobel (2008). We examine whether productive (unproductive) entrepreneurial activity is associated with higher (lower) levels or growth rates of income. Additionally, we aim to “connect the dots” by asking whether higher institutional quality (i.e., greater economic freedom) affects income primarily through its effects on entrepreneurial activity. We argue that, if this is true, economic freedom should be a good instrument for entrepreneurship in an income regression.