Entrepreneurship and Enforcement Institutions: Disaggregated Evidence for Spain

Abstract

Entry of new firms, both in the form of entrepreneurs or corporations, fosters competition and productivity. Both the entry of firms and productivity have been low in the Spanish economy over the recent years. This paper analyzes the determinants of entry focusing on the role of the design and efficacy of enforcement institutions (the judicial system), a traditionally overlooked aspect. In order to do so, we examine disaggregated data at the local level in Spain. We find that higher judicial efficacy increases the entry rate of firms, while it has no effect on the exit rate. Crucially, that impact only occurs in the case of the entry rates of entrepreneurs, defined as self-employed, but not in the case of limited liability corporations. This finding may be explained by the fact that judicial (in)efficacy can be regarded as a fixed cost to be paid by agents that litigate. Hence, the economic activity of entrepreneurs -and specifically, their entry into the market- is expected to be more affected than that of larger firms.