Affirmative action programs and business ownership among minorities and women

Abstract

Affirmative action programs are commonly used as a means to level the playing field for minority- and women-owned firms in public procurement markets, and therefore may be a positive factor in business entry and survival. To the extent that affirmative action programs also apply to traditional labor markets, however, they may alter the opportunity cost of starting a business. We utilize the elimination of affirmative action in California and Washington States through voter initiatives to identify the effect of affirmative action on minority and female self-employment rates. In our base specifications, we find evidence of modest increases in self-employment among minorities and women in both California and Washington after elimination of affirmative action, consistent with the hypothesis that the opportunity cost of starting a business fell due to restricting opportunities in the traditional labor markets. The sign of the estimated effect, however, is not uniformly positive when considering specific race/gender groups, and the statistical significance of the main results is somewhat sensitive to the choice of control states.