Did the unemployment benefits extension between 2009-2013 deter entrepreneurship in the US? Some evidence and a model of unemployment benefits and entrepreneurship

The 2007-2008 financial crisis severely dampened the American entrepreneurial sector, and the rate of business formation remained low until 2014. This study empirically assesses whether the extensions of unemployment benefits (EUB) contributed to the delay in recovery in entrepreneurship. We then introduce a general equilibrium occupational choice model of unemployment benefits and entrepreneurship and use sharp discontinuity and variations across states in the maximum duration of benefits at the end of 2013 to identify the negative impact of EUB on startups. Eliminating the EUB increased entrepreneurship by 1.4-1.78 percentage points in 2014. Regarding the model, moderate increases in unemployment benefits primarily affect entrepreneurship through the extensive margin by deterring low-ability and necessity entrepreneurs while having little impact on decisions for high-ability agents; however, overly generous unemployment benefits can negatively impact entrepreneurship, the labor market and the overall economy.