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Abstract

This paper uses the Stansel (2013) economic freedom index for a maximum of 375 U.S. metropolitan areas to estimate the effect of economic freedom on entrepreneurship while con-trolling for spatial dependence. This paper finds statistically significant evidence that increas-es in economic freedom in one area result in increases in entrepreneurial activity in neighbor-ing areas. Furthermore, the total (direct plus indirect) effects of an increase in economic free-dom on entrepreneurship are positive and statistically significant, indicating that a positive-sum game is present. However, these effects are small in magnitude. In order to explain a cumulative one standard deviation increase in either one of the entrepreneurial measures pre-sented in this paper, there would have to be an increase in the freedom index equivalent to moving from the least-free area to the most-free area.

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