Local Economic Policy Uncertainty and Entrepreneurship: Quantity, Mechanisms, and Structure

This paper investigates how local economic policy uncertainty (EPU) influences entrepreneurial entry. Higher local EPU significantly reduces new firm formation, a result robust to multiple strategies addressing endogeneity, including coefficient-stability analysis, robustness-of-inference-to-replacement, double machine learning, and two-stage least squares. Evidence supports four mechanisms: real-options effects, information frictions, financing constraints, and reduced local demand. EPU also disproportionately reduces entry by firms with female legal representatives and lowers the industrial diversity of entrepreneurship. Among realised entrants, the decline is concentrated among lower-capital registrations, suggesting compositional selection.