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Tarkan Cavusoglu and Oguzhan Dincer

Using a panel of 48 contiguous American states over 15 years, we estimate the co-integrating relationship between economic freedom and entrepreneurial activity and find there is threshold level of development which determines if economic freedom increases entrepreneurial activity or not. According to our estimations economic freedom increases entrepreneurial activity in relatively poorer states. Our results have important policy implications. We do not find a statistically significant relationship between individual areas of economic freedom and entrepreneurial activity, indicating that decreasing the size of the government without decreasing its scope does not cause entrepreneurial activity to increase.