Institutions, entrepreneurship, and economic growth in Europe

Institutions have a decisive impact on the prevalence and nature of entrepreneurship. To date, the impact of institutions on (productive) entrepreneurship and the effects of entrepreneurship on economic growth have largely been investigated in isolation. In this paper, we bring together institutions, entrepreneurship, and economic growth using a parsimonious growth model in a 3SLS specification. In our first stage, we regress multiple measures of entrepreneurial activity on institutional proxies that are known to correlate with more productive forms of entrepreneurial activity. Using the fitted values of this first-stage regression as our proxy for productive entrepreneurship, we can then estimate a panel growth regression following Islam (1995) in a second stage. The third stage then optimizes the estimation of the two equations simultaneously. Our results show that productive entrepreneurship contributes to economic growth. In our set of proxies for institutional quality, financial stability, small government, and perceived start-up skills are the most important predictors of such productive entrepreneurship.