Expectations versus Reality in Business Formation

Emin Dinlersoz and Yueyuan Ma

Working Papers from U.S. Census Bureau, Center for Economic Studies

Abstract: Using administrative data on 17 million U.S. business applications linked to outcomes, we compare potential entrants’ expectations about employer entry and first-year employment with realizations. On average, applicants overestimate employment, mainly because many expect to enter but do not. Among those who expect and achieve entry, employment is typically underestimated. Expected employment predicts entry and realized employment, but conditional on entry realized employment rises less than one-for-one with expectations. Expectation errors are highly heterogeneous and systematically related to application characteristics and local economic conditions, and they predict near-term employment outcomes. A parsimonious model with heterogeneous priors, learning, and pre-entry selection rationalizes these patterns.

Keywords: expectations; expectation error; forecast error; entry; startup size; business formation (search for similar items in EconPapers)
JEL-codes: D84 D90 L25 L26 M21 (search for similar items in EconPapers)
Date: 2026-02
New Economics Papers: this item is included in nep-bec
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https://www2.census.gov/library/working-papers/2026/adrm/ces/CES-WP-26-11.pdf First version, 2026 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:cen:wpaper:26-11

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