Reducing start-up costs for new firms: The double dividend on the labor market

Starting a firm with expansive potential is an option for educated and high-skilled workers. If there are labor market frictions, this additional option can be seen as reducing the chances of ending up in a low-wage job and hence as increasing the incentives for education. In a matching model, we show that reducing the start-up costs for new firms results in higher take-up rates of education. It also gives rise - through a thick-market externality - to higher rates of job creation for high-skilled labor as well as average match productivity. We provide empirical evidence to support our argument.