Institutional protection of minority employees and entrepreneurship: Evidence from the LGBT Employment Non-Discrimination Acts

Abstract

A diverse workforce has long been associated with multiple firm benefits, but this is sometimes difficult to achieve due to employer discrimination. Although multiple institutional arrangements have been put in place to ban discriminatory behavior, the effects of such regulations remain relatively unexplored, often neglecting start-ups. We propose that institutional changes aiming to outlaw employment discrimination will trigger two main effects: they will (a) depress start-up founding rates through enhancement of wage-work appeal, and (b) increase the average start-up quality due to a higher threshold for leaving wage-work. We test our predictions by exploiting the staggered enactment of Employment Non-Discrimination Acts in the U.S. Consistent with our theory, we find that this institutional protection reduced the quantity of entrepreneurship but increased its quality.