Working Papers

Free Enterprise at the Baugh Center

Benentt, Daniel (2020_09) Local Institutional Hetergeneity and Firm Dynamism: Decomposing the Effects of Economic Freedom on Firm Entry & Firm Exit (January 2020)
ABSTRACT: A nascent body of research suggests that economic freedom is positively associated with entrepreneurial activity. Most of this literature is based on cross-countries analyses, although there is significant regional heterogeneity in entrepreneurial activity and the institutional and policy context within countries. The literature also largely overlooks the potential for the entrepreneurial-inducing effects of economic freedom to drive less efficient firms out of the market. Additionally, economic freedom is a multi-dimensional construct comprised of numerous underlying aspects of the institutional and policy environment, but most studies have employed a composite economic freedom measure to assess its impact on entrepreneurial activity. I contribute to these shortcomings in the literature by decomposing the recently developed Metropolitan Economic Freedom Index into its underlying institutional indicators to explore their potential impact on the firm entry and firm exit rates for a sample of nearly 300 U.S. cities over the period 1972-2012.

Bennett, Daniel L., Christian Bjornskov, Stephan F. Gohmann (2019-08) Coups, Regime Transitions, and Institutional Change (April 2019)
ABSTRACT: Coups and regime transitions are events that typically are intended to change the basic institutional framework of a country. Which specific policies change and the consequences of these changes nevertheless remains largely unknown. Change after a coup or transition implies that some form of political or judiciary barrier has been erected or removed. We therefore focus on what happens to the quality of judicial institutions and political corruption around coup attempts and other types of regime transitions. We hypothesize that when coups are conducted by members of the incumbent political elite, they are likely to remove barriers to change while coup makers outside of the ruling elite are more likely to do the opposite and thus protect themselves from what remains of the elite in the political system. Using the Bjørnskov-Rode coup data, our results suggest that successful coups are associated with degradation of institutions, with successful military coups in particular having a significant negative effect. Results are more varied for civilian coups where we find indications of differences depending on whether the coup makers are part of a political elite or not.

Bennett, D. (2018-06). "Infrastructure Investments and Entrepreneurial Dynamism in the U.S." (October 2018)
ABSTRACT: Investments in physical infrastructure induce environmental changes that serve both an enabling and disabling function, potentially acting to simultaneously stimulate new business establishment and provoke exit by some incumbent establishments. The opening of a new establishment results in the creation of jobs that did not previously exist. Similarly, the closing of an establishment results in the permanent loss of jobs. I develop a theoretical model that depicts this external enabler/disabler process and test the model's predictions empirically tested using annual statelevel data spanning the period 1993-2015. The results from dynamic panel system GMM estimation suggest that public and private infrastructure investments exert opposite effects on dynamism. Whereas private infrastructure investment is positively and significantly associated with the creation of businesses and jobs, public infrastructure investments are associated with the destruction of businesses and jobs. These results point to private infrastructure investment serving primarily an entrepreneurial enabler role and public infrastructure investment an entrepreneurial disabler role.

Bennett, D., Long, J. (2018-05). "Is it the Economic Policy, Stupid? Economic Policy, Political Parties & the Gubernatorial Advantace." (May 2018)
ABSTRACT: Incumbent politicians have a well-known advantage in seeking re-election. Using the Economic Freedom of North America dataset, we examine how changes in economic policy during an incumbent governor’s tenure influence the probability of losing their re-election bid. In other words, does economic policy matter for the incumbent advantage? The results suggest that decreases in economic freedom increase the probability of incumbent loss, regardless of the governor's party. A decomposition analysis indicates that these results are primarily driven by the government spending sub-index. A more granular analysis suggests that: (1) increases in government consumption spending and government employment are associated with a lower probability of re-election among Democratic governors, but a lower probability among Republicans; (2) Increases in transfer payments relative to personal income reduce the likelihood of re-election, regardless of party; (3) increases in income taxation relative to personal income and top marginal tax rates are associated with a higher and lower, respectively, probability of losing re-election, but only among Republican incumbents. We also control for a variety of demographic, political and socio-economic factors and find that high unemployment increases the probability that an incumbent loses re-election and net migration reduces it.

Aimone, Jason Anthony, Pan Xiaofei (Sophia). "Blameable and Imperfect: A Study of Accountability and Risk-Taking" (March 2018)
ABSTRACT: Many economic agents, including CEOs, physicians, entrepreneurs, and political leaders are entrusted with decision-making authority. These economic agents act as trustees who make risky decisions, impacting their own welfare and that of their stakeholders. Stakeholders often demand measures to hold these trustees more accountable for their risky decisions. Until now, research has not systematically explored investors' or third-parties' efforts to hold trustees accountable when stakeholders have voluntarily entered into such relationships. Using a novel laboratory experiment, we explore how different accountability mechanisms influence stakeholders’ and third-parties' choices of reward or punishment towards trustee decisions. We also explore which accountability mechanism best nudges trustees towards decisions that maximizes social welfare. Our results contrast with the predictions of existing theories on social preferences and principal-agent models, which struggle to explain stakeholders' persistent outcome bias. We propose that the stakeholders' accountability decisions are best explained by a theory that captures responses to both the pure quality of decisions and the perceived luck of the decision maker, in other words, a good decision with moral luck theory.

Klein, P., Foss, N. (2018-03). "Entrepreneurial Opportunities: Who Needs Them?" (February 2018)
ABSTRACT: Debate in management research on the status of the opportunity construct is now more than a decade old. We argue that the debate has led to little additional insight in entrepreneurship and we develop the case for abandoning the construct altogether. Uncertainty is central to entrepreneurship and innovation yet absent from opportunity-based approaches. We offer instead a "judgment-based view" of entrepreneurship which revolves around the nexus of resource heterogeneity and uncertainty and is operationalized in the "Beliefs-Actions-Results" (BAR) framework.

Klein, P., Foss, N. (2018-02). "Stakeholders and Corporate Social Responsibility: An Ownership Perspective" (February 2018)
ABSTRACT: We argue that the stakeholder and CSR literatures can benefit from more systematic thinking about ownership. We discuss general notions of ownership in economics and law and the entrepreneurial notion of ownership we have developed in prior work. On this basis, we argue that stakeholder theory needs to deal more systematically with ownership as an economic function that can be exercised with greater or lesser ability, may be complementary to other economic functions, and works better when assigned to homogeneous groups. Some stakeholder groups are likely to lack what we call "ownership competence," even if they have made relationship-specific investments, in part because of diverse interests. We also discuss CSR from the perspective of ownership and support Friedman’' original position, but with a twist. The point of Fried-man’s paper is not that firms "should" maximize profits, but that managerial pursuit of "socially responsible" activities in a discretionary way imposes costs on owners. We suggest this problem is exacerbated with entrepreneurial managers who can devise new ways to disguise self-interested actions as CSR initiatives.

Klein, P., Packard, M., Clark, B. (2017-05). "Uncertainty Types and Transitions in the Entrepreneurial Process" (April 2017)
ABSTRACT: While judgment is typically viewed as a discrete decision process, we conceptualize it as a continuous anddynamic process of reassessment and revision. Adopting this approach, we revisit the nature of entrepreneurial decision-making under uncertainty. We begin with a novel typology of uncertainty that defines and delineates different types of uncertain contexts. We then examine the nature of decision-making within these distinct contexts, highlighting differences in how entrepreneurs make decisions within different types of uncertainty. We build these insights into a theory of the entrepreneurial process that highlights the transitory nature of uncertainty as entrepreneurs make certain judgments and revise those judgments over time. We discuss how uncertainty transitions throughout the judgment process, how the judgment processcontinues dynamically even after a judgment is made, and how the nature of uncertainty shifts over time due to endogenous and exogenous change.

Aimone, Jason Anthony, Pan Xiaofei (Sophia). "My Risky Opportunities but Our Investment: An Experiment on Trust-Over-Risk" (November 2016)
ABSTRACT: Trust is a key factor affecting investors' decisions to invest in other agents. These "trustee-agents" use an investor's funds to engage in unique risky opportunities. However, little is known about trustee reciprocity in such environments. Our experimental environment is the first to combine a trust game with a risk taking game to explore both investors' trust and financial trustees’ reciprocation in such trust-over-risk environments. We find widespread Reciprocity-over-risk, whereby trustee-agents deviate from their own preferred risk choices in both shared and non-shared risk environments. Further, punishment threats push trustees to systematically choose risk opportunities that have lower expected monetary values.

Klein, P., Kolympiris, C. (2016-04). "The Effects of Academic Incubators on Univeristy Innovation" (October 2016)
ABSTRACT: We analyze the impact of academic incubators on the quality of innovations produced by US research-intensive academic institutions. We show that establishing a university-affiliated incubator is followed by a reduction in the quality of university innovations. The conclusion holds when we control for the endogeneity of the decision to establish an incubator using the presence of incubators at peer institutions as an instrument. We also document a reduction in licensing income following the establishment of an incubator. The results suggest that university incubators compete for resources with technology transfer offices and other campus programs and activities, such that the useful outputs they generate can be partially offset by reductions in innovation elsewhere.

Klein, P. (2016-03). "My Contributions to Entrepreneurial Theory" (May 2016)
ABSTRACT: I briefly summarize my contributions to entrepreneurship theory, focusing on the links between contemporary entrepreneurship research, the “Austrian” understanding of markets and prices, and the economic theory of the firm. I articulate the “judgment-based approach” to entrepreneurial action and argue that entrepreneurship can and should be more tightly integrated into theories of production and exchange, firm strategy and organization, and public policy and ad-ministration. I also distinguish the judgment-based approach from the opportunity-discovery perspective associated with Israel Kirzner.

Bradley, S., Wood, M., Bylund, P. (2016-02). "The Influence of Tax and Regulatory Policies on Entrepreneurs' Oppotunity Evaluation Decisions" (June 2016)
ABSTRACTThe purpose of this paper is to investigate effects of policy initiatives on entrepreneurs’ opportunity evaluation decisions. Design/methodology/approach – Factors were selected from real world policy initiatives. The model pricing power as a traditional economic base rate attribute and then considering how variance in use fees and reporting requirements changes the base rate relationship. The factors served as decision attributes in a conjoint analysis experiment. A total of 126 entrepreneurs made 2,268 opportunity evaluation decisions. Findings – While increases in pricing power result in a positive upward base rate opportunity evaluation, government mandated use fees and reporting requirements diminish the base rate toward the negative. This suggest that that even though the likely profits are much higher with the significant pricing power opportunity, entrepreneurs heavily discount these opportunities because they view the combination of economic costs of paying high use fees and the non-pecuniary costs of reporting requirements as unappealing. Further, the authors find entrepreneurs disproportionately discount higher margin opportunities when the regulatory burden is higher revealing the importance of policy factors in new product introduction decisions. Practical implications – Policy has traditionally focussed on the macro-level effects of initiatives and how they directly affect issues like economic growth. This study reveals that this is only part of the equation because changes in government policy impact entrepreneurs’ opportunity evaluation decisions that underpin macro trends. In order to be effective, policy makers need to pay greater attention to not only the economic, but also the non-pecuniary costs that policy changes evoke. This is especially true for those policies like reporting requirements that may be perceived as threats to entrepreneurs’ sense of autonomy. Originality/value – This research brings to the foreground the relationship between the policy environment and the cognitions and decision of individual entrepreneurs whose collective actions move the economy. The net effect is new insight regarding how policy factors coalesce to influence entrepreneurs’ assessments of opportunities, often in ways that negatively affect these assessments beyond what simple economic calculations would suggest.

Klein, P., Foss, K., Foss, N. (2016-01). "Managerial Authority in the Coasean Firm, An Entrepreneurial Perspective" (January 2016)
ABSTRACT: We describe and discuss Ronald Coase’s approach to managerial authority, placing it in the broader context of recent economics and management research on intrafirm coordination. To do so, we make use of work by Coase that is relatively little known, namely his writings on opportunity cost (Coase, 1938; Buchanan and Thirlby, 1973). Coase explicitly linked his under-standing of opportunity cost to the work he was simultaneously doing on the theory of the firm, but did not relate it to his later work on social cost. We bring in the property rights perspective associated with Coase’s (1960) later work on social cost by focusing on the role of managers in delineating property rights to assets in ways that maximize the value of production. Coase (1960) discusses the legal system and public organizations as two institutions that specialize in the delineation and enforcement of property rights. In contrast, in the same paper, he also hints at a notion of the firm as an institution that rearranges previously legally defined property rights. Picking up on this idea, we consider how firms, and more specifically managers, undertake the role of delineating and rearranging property rights.


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