Spurring Serious Small-scale Entrepreneurship: A Policy Experiment to Lower Entry Costs (12:30 -13:45)

Category: Applied Microeconomics and Organization Seminar , Management & Microeconomics Brown Bag Seminar
When: 06 June 2019
, 12:30
 - 13:45
Where: RuW 4.201

by Kathryn Shaw and Anders Sorensen


People and governments believe that increased entrepreneurship creates a more robust economy and creates new jobs in the long run. While governments foster small business creation in many ways, in some ways they create barriers, as through high expenses for LLC registration. In Denmark, registration costs were effectively 50% of a firm’s first year profits. In 2010, Denmark introduced a policy experiment in which they lowered the costs of LLC registration by 37%, and thus lowered the costs of entry for new business creation.

Using several different methods to identify the impact of this policy change, we show that the experiment raised entry into LLC status relative to sole proprietorship by about 12% every year after the treatment (prior to the treatment, 35% of firms were LLC). In addition, average sales of new firms rose 17% due to the treatment. While these effects seem modest, the average sales of the LLC, across all firms, is about double that of the sole proprietorship (SP). Thus, in the long run, as this treatment induces more entry every year, LLC firms will build up and sales would grow.

This paper makes several points. First, the entrepreneur’s proclivity to choose LLC status when opening a firm is partially innate to a person – Levine and Rubenstein (2017) show risk-takers open more LLC firms. However, either high costs (in Denmark) or lack of information also hampers LLC registration, and these can be reversed. Second, those induced to open LLC firms open higher sales firms, suggesting that either they begin taking more risks that increase sales, or that, though they were at the margin of sole proprietor vs. LLC, they were not of considerably lower innate caliber than others previously registered LLC entrepreneurs.

A third point of the paper does not model the policy experiment, but instead follows serial entrepreneurs as they age and learn. In Denmark, of all new firms, 30% are opened by serial entrepreneurs (1990-2013). When comparing the serial entrepreneur to the novice entrepreneur, who opens only one firm, the serial entrepreneur’s first firm has sales that are 60% higher, and his second firm has sales that are about 100% higher (holding constant the entreprneur’s experience and traits). Looking within the serial entrepreneurs’ careers, young serial entrepreneurs (age 25 when they enter) approximately double their sales and productivity of their second firm relative to their first firm. Concurrently, about half of these young people open their first firm as SP and their second firm as LLC. They are learning to grow sales and they are learning to registers as LLC.

This paper has Danish data that follows the sales of new firms over time, not just the personal earnings of the entrepreneurs. Therefore, we are able to confirm that LLC firms have much higher sales and productivity than SP firms, but in addition, to show that there is a set of “Serious” entrepreneurs who tend to be both LLC and serial entrepreneurs, and that these combined features make them much more successful than the set of all other entrepreneurs. Moreover, young people learn to be “serious,” as they double the sales of their second firm relative to their first firm, and as they learn to change from SP to LLC status. Therefore, as the policy experiment lowering LLC registration costs induces more LLC firms, and it increases the entry of new LLC year after year, and also could encourage young people to open as LLC and perform at higher levels early in their careers. Overall, when people are encouraged to register as LLC or learn to register as LLC, their firms’ sales grow. Finally, though these new Danish firms are small, the distribution of sales success is quite skewed: mean annual sales are $360,000 and median sales are $216,000.