Bureaucracy and Entrepreneurship

A fundamental premise of sociological approaches to entrepreneurship is that social context shapes the likelihood of entrepreneurial activity, above and beyond any effects of individual characteristics. For example, a long tradition in organizational theory holds that working in bureaucratic organizations suppresses rates of entrepreneurship. Establishing such contextual effects empirically, however, is complicated by the possibility that unobserved individual traits cause people both to become entrepreneurs and to work in less bureaucratic settings. This paper presents the first systematic study of the effects of bureaucracy on entrepreneurship that accounts for such unobserved sorting processes. Using rich data on labor market attachments and transitions to entrepreneurship in Denmark, I find that people who work for large and old firms are less likely to become entrepreneurs, net of a host of observable individual characteristics. Moreover, there is strong evidence to suggest that this negative effect of bureaucracy does not spuriously reflect self-selection by nascent entrepreneurs into different types of firms. The implications of this finding for theories of organizations and entrepreneurship are discussed.