Local Institutional Heterogeneity and Firm Dynamism : Decomposing the Metropolitan Economic Freedom Index

A nascent body of research suggests that economic freedom is positively associated with entrepreneurial activity. Most of this literature is based on cross-countries analyses, although there is significant regional heterogeneity in entrepreneurial activity and the institutional and policy context within countries. The literature also largely overlooks the potential for the entrepreneurial-inducing effects of economic freedom to drive less efficient firms out of the market. Additionally, economic freedom is a multi-dimensional construct comprised of numerous underlying aspects of the institutional and policy environment, but most studies have employed a composite economic freedom measure to assess its impact on entrepreneurial activity. I contribute to these shortcomings in the literature by decomposing the recently developed Metropolitan Economic Freedom Index into its underlying institutional indicators to explore their potential impact on the firm entry and firm exit rates for a sample of nearly 300 U.S. cities over the period 1972-2012