The effect of regime change on entrepreneurship: A real options approach with evidence from US gubernatorial elections

David S. Lucas

Journal of Business Venturing, 2024, vol. 39, issue 4

Abstract: Although political turnover is said to be a healthy component of the business environment, the literature is equivocal about the effects of regime change on early-stage entrepreneurial activity. I present incumbent displacement—the electoral defeat of an incumbent political party's candidate—as a source of regime change, and I analyze how this affects business formation through the lens of real options theory. I test my theory using US gubernatorial elections from 2004 to 2022, leveraging a Regression Discontinuity design to compare changes in business formation trends following elections where a challenger party candidate wins or loses by a close margin. I find that regime change reduces venture creation activity for growth-oriented ventures specifically. I also find evidence of a partial rebound in subsequent months—suggestive that some entrepreneurs delay entry while others permanently abandon their ventures.

Keywords: Entrepreneurship; Regime change; Regression discontinuity; Organizational & institutional economics; Policy uncertainty; Real options theory (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbvent:v:39:y:2024:i:4:s0883902624000168

DOI: 10.1016/j.jbusvent.2024.106394

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