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This paper aims to examine how economic freedom impacts the initial choice of legal structure for startup firms. The authors do this by first exploring whether economic freedom is an essential determinant of the initial legal form of organization (LFO). The authors then explore the impact of economic freedom on firms' choice of changing their initial legal structure over time and how this change impacts their survival rate.

The authors employ a multinomial logistic regression model to measure the initial determinants of LFO by utilizing an eight-year panel data set of 4,928 startups in the USA through the Kauffman firm survey and merge it with the Economic Freedom in North American index from the Fraser Institute. The authors then employ a logistic regression model to examine the determinants facilitating a change in legal structure over time.

The results show that economic freedom is a significant determinant in the choice of legal structure. The findings also report that the majority of startups do not change their legal form, but of those that do change the legal structure show a higher survival rate.

Major limitations are the size of the data and the nature of somewhat limited economic freedom differences with the USA. More nuanced measures of economic freedom would be highly desirable.

Policymakers should take note that limited red tape, smoothly working labor markets and straightforward processes for changes of legal structures of organizations would improve survival and growth odds for entrepreneurs.

Drawing on the theory of institutions, the authors attempt to bridge a gap in the literature by explicitly analyzing the determinants of the legal structure in startups in light of economic freedom. Institutional factors do not work in isolation; therefore, the authors also employ traditional entrepreneur-specific variables that affect the choice of legal structure in addition to the institutional framework.

Recent findings by Hamilton (Journal of Political Economy, 2000) suggest that the self-employed do not receive a monetary premium for the risk and uncertainty associated with business ownership. The purpose of this paper is to show that income underreporting by entrepreneurs can explain the lack of evidence for monetary premia. Using a large national data set (Panel Study of Income Dynamics (PSID)), the author first document evidences of underreporting, and then proceed to make alternative comparisons using measures of consumption. The author finds that the self-employed enjoy large earnings premia that are reflected in their consumption.

Using PSID the author creates and analyzes a household level data set comparing monetary rewards of self-employment to those of wage work. The author employs previous findings about entrepreneurial saving behavior to show, via quintile regression analysis, consumption rewards to entrepreneurship, and compare those rewards to income rewards.

The author finds self-employed enjoying significant consumption premia, over the income premia, throughout the income distribution. Contrary to previous claims (e.g. see Hamilton, 2000) the author finds that self-employment is a financially rewarding undertaking. Due to different income reporting metrics and tax exemption structure entrepreneurs enjoy even larger monetary rewards when compared to wage workers along consumption axis. In light of these findings the paper proposes consumption, rather than income metrics, to be applied when quantifying rewards to self-employment.

Household level of analysis is a major drawback in using this approach. This is an outcome of consumption data collected and reported on household rather than individual income. Because of this limitation transitions into and out of self-employment cannot be separated from household changes, i.e., divorces and marriages. However, divorces and marriages are assumed to not have systematic component favoring wage workers or self-employed.

Significant resources are allocated toward supporting entrepreneur. Small business administration, congress, state agencies, and community development corporations contentiously outline both risks associated with failure rates and low rewards to self-employment. This paper provides policymakers with better tools for assessment of true monetary rewards. Better assessment of true rewards, especially contrasting corporations vs individual earnings in self-employment should enable the policymakers to provide better support for the entrepreneur.

Entrepreneur, in social light, is perceived as a much more successful individual. This view differs with recent data. Previously overly naive positive estimate of entrepreneur has been attributed to the bias of survival. This paper provides additional support for social view of entrepreneur by pointing to an overlooked, by the policymakers and most researchers, information segment – consumption data. These additional benefits that have been well understood by the public can now be substantiated for the policymakers.

This paper develops unique method for documenting monetary rewards to entrepreneurship. Using information about entrepreneurial saving behavior this paper demonstrates significant monetary premia, over reported income premia enjoyed by entrepreneurs. The premia is documented throughout income distribution and is not an outcome of entrepreneurial superstars or even average entrepreneur.

The purpose of this paper is to test the effects of government policies on entrepreneurial activity within the 50 US states.

Using panel data and a fixed-effects model, the authors examine the determinants of the nominal establishment entry rate, the nominal establishment exit rate, and the net establishment entry rate. To measure government policy, the authors use the Economic Freedom of North America (EFNA) index published by the Fraser Institute. The authors use both the overall index and its components. The authors also use the state and local tax burden published by the Tax Foundation.

The authors find that a smaller government is associated with a net increase in business establishments. A freer labor market is also associated with a net increase in business establishments. However, the relationship between the tax burden and entrepreneurship is more complex. Using a measurement of the tax burden from the Fraser Institute, the authors find that an increase in taxes is associated with a net decrease in businesses, but the measurement from the Tax Foundation suggests that an increase in taxes is associated with a net increase in businesses.

The results can help policy makers recognize the effects of expenditure and regulation on business formation.

However, the results do not send a clear message on the effects of taxes on entrepreneurship.

The contribution to the literature is the examination of the effect of the components economic freedom on net business entry in the USA, along with comparing the effects of two measurements of tax burden on net business entry.