Entrepreneurship and the Allocation of Government Spending Under Imperfect Markets

Abstract

Previous studies have established a negative relationship between total government spending and entrepreneurship activity. However, the relationship between the composition of government spending and entrepreneurial activity has been woefully under-researched. We fill this gap in the literature by empirically exploring the relationship between government spending in social and public goods and entrepreneurial activity under the assumption of credit market imperfections. By combining macro-economic government spending data with individual level entrepreneurship data we find a positive relationship between increasing the share of social and public goods at the cost private subsidies and entrepreneurship while confirming a negative relationship between total government consumption and entrepreneurial activity. The implication may be that expansion in total government spending includes huge increases in private subsidies at the cost of social and public goods which are detrimental towards entrepreneurship.