Unemployment, Entrepreneurship and Firm Outcomes

Do differences exist between firms created by unemployed individuals relative to those created by otherwise identical employed individuals? I develop a general equilibrium model of entrepreneurship with endogenous entry and exit that allows for different choices of business projects by unemployed and employed individuals. The model predicts that (1) different outside options imply that the unemployed are more likely to start firms, but these are smaller and they fail more often and (2) employed individuals are more responsive to wages than the unemployed in their decision to start a firm. I verify these implications using a new administrative Canadian matched owner-employer-employee dataset. I use firm closures to identify random assignments of individuals to unemployment. Finally, using a quantitative version of the model, I show that subsidizing entrepreneurship among the unemployed has little impact on job creation and induces a reallocation of resources to low productivity firms. (Copyright: Elsevier)