State Entrepreneurial Climate Estimates: An Update Based on the Kauffman Index

Abstract:     
The study uses the Kauffman Index (KI) of entrepreneurial activity (Fairlie 2008) and Solow-type residuals from a year-to-year change (dKI) model to update and expand on an earlier attempt to estimate entrepreneurial climates for each state. Patent activity and human capital are found to be associated with intensifying entrepreneurial activity. However, financial investments typically associated with innovation tend to depress entrepreneurial activity, possibly due to a crowding-out effect. Higher local unemployment rates are associated with more entrepreneurial activity, reflecting entrepreneurship of necessity as opposed to opportunity. While greater labor market freedom clearly encourages entrepreneurship, higher levels of healthcare premiums paid by small businesses discourage such activity. Based on the Kauffman Index, Tennessee, Wyoming, California, Delaware and New York have the best entrepreneurial climates; West Virginia, Alabama, Nevada, Pennsylvania and Connecticut rank at the bottom.

Keywords: entrepreneurship, Kauffman Index, climate, state rankings

JEL Classifications: M13

Working Paper Series