Abstract
This study evaluates the causal effect of government debt on entrepreneurship. Exploiting New Budget Law reform in China that regulates the scale of local government debt, we find that government debt reduction bolsters entrepreneurial ventures by optimizing land utilization and enhancing access to start-up loans. Consistently, the entrepreneurial effect is more pronounced in unregulated industries and downstream sectors. Furthermore, we demonstrate that government debt reduction also contributes to entrepreneurship quality. It induces smaller entrants with higher survival rates post-reform, resulting in more incumbent enterprises exiting. Our results underscore the benefits of encouraging government debt governance experimentation in lowering entry barriers.
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