Abstract
Entrepreneurship serves a fundamental role in the economy by leading innovations and promoting economic growth. However, the question of whether government interventions spur entrepreneurial activity is a topic of considerable debate. Proponents highlight the role of public funds in serving as a catalyst to offset the risk and uncertainty that are characteristic of early-stage ventures, while critics emphasize that publicly supported early-stage ventures tend to yield lower rates of private return. Adequately addressing this question requires that we not only account for the level of startup activity but also the nature of entrepreneurial experimentation that includes failure. We argue there is a more conclusive interpretation to this theoretical debate when we expand the scope of analysis to account for broader societal implications. Using the staggered diffusion of the U.S. State Small Business Credit Initiative and county-level Kickstarter crowdfunding data, we find consistent evidence of a positive effect of public funding on the level of entrepreneurial activity. However, when we account for the venture’s success or failure to raise initial capital to launch and advance beyond the ideation stage, the relationship appears to manifest primarily among failed projects. These results offer conclusive findings that resolves a theoretical tension — public funding policies can productively drive economic growth and innovation by encouraging experimentation.
Published Version
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