Why encouraging more people to become entrepreneurs is bad public policy

TLDR

Policymakers often believe that increasing start‑up creation will revitalize depressed regions, spur innovation, and generate jobs, but this view overlooks that entrepreneurial growth is not a simple numbers game. The study argues that policy should shift from subsidizing typical start‑ups to encouraging the formation of high‑quality, high‑growth companies. Governments cannot pick winners, but can identify low‑probability start‑ups and eliminate incentives for them. The evidence shows that typical start‑ups are uninnovative, create few jobs, and generate little wealth, and that removing incentives for low‑probability firms can raise the average performance of new businesses.

Abstract

Policy makers often think that creating more start-up companies will transform depressed economic regions, generate innovation, and create jobs. This belief is flawed because the typical start-up is not innovative, creates few jobs, and generates little wealth. Getting economic growth and jobs creation from entrepreneurs is not a numbers game. It is about encouraging the formation of high quality, high growth companies. Policy makers should stop subsidizing the formation of the typical start-up and focus on the subset of businesses with growth potential. While government officials will not be able to "pick winners," they can identify start-ups with a low probability of generating jobs and enhancing economic growth. By eliminating incentives to create these low probability companies, policy makers can improve the average performance of new businesses.