Local economic freedom and creative destruction in America

Abstract

Economic freedom facilitates the market selection mechanism that enables the Schumpeterian creative destruction process. I develop a framework depicting how economic freedom, which reduces entry barriers and transaction costs, acts as an external enabler that facilitates the creation of firms and jobs. It also facilitates the market correction device, potentially serving as a disabling force to allow firm and job destruction. Using a novel metropolitan statistical area–level dataset, I investigate empirically the role of local economic freedom on dynamism for a sample of nearly 300 U.S. cities over the period 1972–2012. My results confirm that economic freedom is positively associated with firm and job creation, but it has no effect on firm and job destruction.