Social Interactions and Entrepreneurial Activity

We show that individuals residing in highly entrepreneurial neighborhoods are more likely to become entrepreneurs and invest more in their own businesses, even though their entrepreneurial profits are lower and their alternative job opportunities more attractive. These findings are robust to the inclusion of local labor market fixed effects, neighborhood fixed effects, extensive controls, and the use of instruments for neighborhood entrepreneurial activity. Our results suggest that peer effects create non-pecuniary benefits from entrepreneurial activity and play an important role in the decision to become an entrepreneur. Alternative explanations, such as entry costs, social learning, and informal credit markets, do not find support in the data