Does State Merit Aid Increase Entrepreneurship? Evidence from Georgia’s HOPE Scholarship Program

• In Event: College and Post-College Outcomes of Merit-Based Financial Aid

Abstract

This study examines how higher education experiences and costs affect entrepreneurship opportunities.  Because student loan debt discourages entrepreneurship (Krishnan and Wang 2019), it seems likely that efforts to reduce debt – such as merit-based scholarship programs – might encourage entrepreneurship among aspiring entrepreneurs with a wide range of economic backgrounds. Examining this possibility has important public policy implications as many states have adopted broad, merit-based scholarship programs that drastically reduce the net, or out-of-pocket, costs of college. Thus, in this study, we ask, does merit aid increase rates of entrepreneurship? And if so, for which students and for what types of companies?

One of the first and most well-known merit-based scholarship programs, Georgia’s HOPE Scholarship, covers up to 90 percent of public university tuition for students earning a B or better high school GPA, and 100 percent of tuition for students with a 3.7 or higher GPA and 1200 or higher SAT scores. While a large body of evidence has accumulated on the effects of merit scholarships on college attainment and graduation, as well as unintended consequences of the programs, no research has examined the scholarships’ effects on economic development generally, and entrepreneurship patterns specifically.

We hypothesize that broad-based state merit scholarships may promote entrepreneurial entry by reducing the net cost of college and student debt burdens, which in turn provides students with additional capital and financial slack to engage in entrepreneurship. Additional financial resources and reduced debt may be particularly critical to post-graduation opportunities for students with limited family resources, mainly underrepresented founders (Lyons and Zhang 2017).  We also hypothesize that merit scholarships are more likely to increase registrations for business that are likely to be lower-growth entities, though other factors such as the type of institution attended (for example, research universities) may mediate this relationship due to differing social capital and peer influence (Eesley and Wang 2017).

Our study makes use of student-level data on students attending the University System of Georgia (USG) between 2008 and 2019 - including demographic indicators (e.g., home state and zip code, race, ethnicity, household income and gender), financial aid received (e.g., merit-based scholarship receipt and loss), grade point average, credit accumulation and graduation status – with new business registration data from the Georgia Secretary of State.  These data facilitate a descriptive understanding of the incidence of entrepreneurship activities among both merit-based scholarship recipients and non-recipients, including differences in patterns across student demographics and geography.  We then use propensity score matching to create a dataset of observationally-similar students with and without merit-based scholarships and compare the incidence of business start-ups across these groups.

Preliminary results suggest that merit aid receipt is related to a higher likelihood of starting a business in Georgia, particularly among students who are eligible for Pell Grants.  These businesses are more likely, though, to be “low-growth” rather than “high-growth" companies.  The results suggest that merit aid programs could provide an effective strategy to increase equality in entrepreneurship.

Authors

• Paige Clayton, Georgia Institute of Technology
  Non-Presenting Co-Author

• Ross Rubenstein, Georgia State University
  Presenting Author