Expectations versus Reality in Business Formation
February 2026
Working Paper Number:
CES-26-11
Abstract
Using administrative data on 17 million U.S. business applications linked to outcomes, we compare potential entrants' expectations about employer entry and first-year employment with realizations. On average, applicants overestimate employment, mainly because many expect to enter but do not. Among those who expect and achieve entry, employment is typically underestimated. Expected employment predicts entry and realized employment, but conditional on entry realized employment rises less than one-for-one with expectations. Expectation errors are highly heterogeneous and systematically related to application characteristics and local economic conditions, and they predict near-term employment outcomes. A parsimonious model with heterogeneous priors, learning, and pre-entry selection rationalizes these patterns.
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:
econometric,
estimating,
employ,
entrepreneurial,
entrepreneur,
entrepreneurship,
forecast,
unobserved,
hiring,
econometrician,
entry productivity,
applicant
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identified to contain references to specific institutions, datasets, and other organizations.
:
Internal Revenue Service,
Ordinary Least Squares,
Longitudinal Business Database,
Employer Identification Numbers,
Department of Homeland Security,
North American Industry Classification System,
American Community Survey,
Limited Liability Company,
Linear Probability Models,
Business Formation Statistics,
COVID-19,
Professional Services,
Maximum Likelihood Estimation,
Guzman and Stern,
COVID
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