The Wealth of Regions: Government Quality and Entrepreneurship in Europe

Abstract

This paper argues that government quality – operationalized as the ability of government to treat all their citizens in an impartial way – levels the ‘playing field’ for economic agents with and without connections to politicians and administrators in government, therefore encouraging entrepreneurial minded individuals to start or develop their business. Based on a unique data set on the quality of government in 172 regions of 18 European countries, the paper shows that regions with more impartial governments have significantly more small and medium-sized firms. It is also shown that quality of government is a determinant of the spatial distribution of entrepreneurship within countries. Under partial governments entrepreneurs face incentives to create and maintain special relations with power holders and therefore to be closer to the source of privileges and locate their activities around the national capitals, where the most relevant political connections rest.