Refined by Fire: The Great Depression and Entrepreneurship

Abstract

Industrial production in the United States declined by 47 percent between 1929 and 1933. This paper quantifies how the severity of the Great Depression within a location may affect contemporaneous entrepreneurship rates. On one hand, a more severe decline in productivity could have persistent effects that adversely affect entrepreneurship today. On the other hand, a more severe decline could have prompted individuals growing up during the Great Depression to become more entrepreneurial and frugal, thereby influencing the values they emphasized to their children. Consistent with the latter hypothesis, we find that a one percentage point increase in retail sales growth is associated with a 0.04 percentage point decline in entrepreneurship two generations later. Using the Panel Study of Income Dynamics, we explore the role of personal experience and upbringing as a moderating factor, finding that individuals in areas more affected by the Depression are more financially sophisticated.

Keywords: Entrepreneurship; Growth; Great Depression; Behavioral Finance

JEL Classification: O4, E71, N12, E21