Institutional protection of minority employees and entrepreneurship: Evidence from the LGBT employment non-discrimination acts

A diverse workforce has long been associated with mul- tiple firm benefits, but this is sometimes difficult to achieve due to employer discrimination. Although mul- tiple institutional arrangements have been put in place to ban discriminatory behavior, the effects of such reg- ulations 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 predic- tions by exploiting the staggered enactment of Employ- ment Non-Discrimination Acts in the U.S. Consistent with our theory, we find that this institutional protec- tion reduced the quantity of entrepreneurship but increased its quality.