Human Capital and Entrepreneurship

Abstract

This study investigates the causal effect of human capital on entrepreneurship. We use China’s higher-education expansion in 1999 as an exogenous shock to conduct difference-in-differences estimation and find that human capital enhances entrepreneurship significantly. Our results are robust to different specifications and measures. We provide supportive evidence based on two alternative natural experiments: China’s university relocation (1952) and the restart of the college entrance exam (1977). Plausible mechanisms that drive our results are resource acquisition, opportunity identification, and decrease in labor cost. We also find that institutional quality, trust, and financing conditions significantly strengthen our findings.

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