Barriers to Entry, Entrepreneurship, and Income Inequality within the United States

Abstract

Regulations can create economic rents for incumbents at the expense of new entrants, thereby limiting entrepreneurship and exacerbating income inequality. Cross-country studies have shown that higher costs to starting a business tends to slow new firm formation (Chambers and Muenmo 2019) and that an unfavorable environment for business can increase poverty and income inequality (Chambers, McLaughlin, et al. 2019a; Djankov et al. 2018). We build on the current literature by testing whether barriers to starting a business at the state and city level in the United States are associated with changes in entrepreneurship and income inequality. Results show that there is a negative association between barriers to starting a business and the rate of firm exit. The coefficients of interest are statistically significant in state level regressions but not in city level regressions. We find only limited evidence that barriers to starting a business are associated with income inequality.

Keywords: Barriers to Entry, Cost of Starting a Business, Regulation, Entrepreneurship, Income Inequality

JEL Classification: D63;,D73, L26, L51