Which State Policies Lead to U.S. Firm Exits? Analysis with the Economic Freedom Index

Abstract

This research investigates the relationship between public policy and firm deaths in the U.S. states. Policies that promote firm births may increase or decrease firm deaths. We use components of the Economic Freedom of North America index as a metric to evaluate the relationship between increased government size and firm deaths for the 50 states during 1989–2004. Elements of economic freedom are significantly related to firm deaths but in conflicting directions. We find that in the relevant range, some increases in state policy lead to firm death more than others. The paper also discusses our results and the implications for both future academic research and public policy.