We use a micro dataset that collects information across individuals, countries, and time to investigate the determinants of entrepreneurial activity in thirty-seven developed and developing nations. We focus both on individual characteristics and on countries ’ regulatory differences. We show that individual characteristics, such as gender, age, and status in the workforce are important determinants of entrepreneurship, and we also highlight the relevance of social networks, self-assessed skills, and attitudes toward risk. Moreover, we find that regulation plays a critical role, particularly for those individuals who become entrepreneurs to pursue a business opportunity. The individual characteristics that are impacted most by regulation are those measuring working status, social network, business skills, and attitudes toward risk. 1

Abstract: Using a comprehensive database of firms in Western and Eastern Europe, we study how the business environment in a country drives the creation of new firms. Our focus is on regulations governing entry. We find entry regulations hamper entry, especially in industries that naturally should have high entry. Also, value added per employee in naturally “high entry ” industries grows more slowly in countries with onerous regulations on entry. Interestingly, regulatory entry barriers have no adverse effect on entry in corrupt countries, only in less corrupt ones. Taken together, the evidence suggests bureaucratic entry regulations are neither benign nor welfare improving. However, not all regulations inhibit entry. In particular, regulations that enhance the enforcement of intellectual property rights or those that lead to a better developed financial sector do lead to greater entry in industries that do more R&D or industries that need more external finance.

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This paper studies the e¤ects of international openness and contracting institutions on vertical integration. It …rst derives a number of predictions regarding the interactions between trade barriers, contracting costs, technology intensity, and the extent of vertical integration from a simple model with incomplete contracts. Then it investigates these predictions using a new dataset of over 14000 …rms from 45 developing countries. Consistent with theory, the e¤ect of technology intensity of domestic producers on their likelihood to vertically integrate is decreasing in the quality of domestic contracting institutions and in international openness. Contract enforcing costs are particularly high in developing countries and their e¤ects on the vertical structure of technological intensive …rms may have signi…cant welfare costs. If improving domestic contracting institutions is not feasible an equivalent solution is to increase openness to international trade. This would discipline domestic suppliers reducing the need for vertical integration.

This paper deals with credit market imperfections and idiosyncratic risks in a two–sector heterogeneous agent dynamic general equilibrium model of occupational choice. We focus especially on the effects of tightening financial constraints on macroeconomic performance, entrepreneurial risk–taking, and social mobility. Contrary to many models in the literature, our comparative static results cover a broad range for borrowing constraints, from an unrestrained to a perfectly constrained economy. In our baseline model, we find substantial gains in output, welfare, and wealth equality associated with credit market improvements. The marginal gains from relaxing constraints are largest for empirically relevant debt–equity ratios. Interestingly, the entrepreneurship rate and social mobility respond non–monotonically to a change in the tightness of financial constraints. The results crucially depend on the degree of income persistence and feedback effects in general equilibrium, where optimal firm sizes and the demand for credit are determined endogenously.

We use two micro datasets that collect harmonized data across countries to investigate the effects of regulation on new businesses. We are able to distinguish between two types of entrepreneurs: those who start a business to pursue a business opportunity and those who could not find better work. Irrespective of the measure of regulation we use, we always find a detrimental effect of regulation on new businesses. While women are overall less likely to start new businesses, in more regulated countries women are pulled into entrepreneurship but not to pursue a business opportunity, only because they could not find better work. Moreover, regulation dampens the effects of self-assessed business skills and social networks. In more regulated economies, those with better business skills and those who know other entrepreneurs are less likely to become entrepreneurs to purse a business opportunity. Tighter regulation also exacerbates fear of failure, further discouraging business start-up. All our estimates point to a negative effect of regulation. 1

We explore why developing countries exhibit a different distribution of firm sizes in the formal private sector relative to developed countries and find evidence that these distributional differences are driven by institutional weaknesses, which might indicate tax avoidance. Using a unique data set that covers the entire formal private sector of Cote d’Ivoire (accounting for 60 % of GDP) over the period 1998-2003, we first show that the distorted firm size distribution relative to developed countries is systematic across all sectors of the economy. We next use firm-level data to examine in greater detail the impact of taxation and find evidence of a humped shape pattern of effective tax rates, where middle-sized …rms face the largest tax burden. This maximum tax burden corresponds to the highest rate of firm turnover. Finally, in a novel extension of Hsieh and Klenow (2009) we quantify the output effects of moving to a more efficient firm size distribution when firm-specific distortions are removed, estimating output gains of 50-60%.

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