Occupational licensure and entrepreneurs: the case of tax preparers in the U.S.

Albert, K, Galperin, R and Kacperczyk, O (2019) Occupational licensure and entrepreneurs: the case of tax preparers in the U.S. Industrial and Labor Relations Review, 72 (5). pp. 1065-1093. ISSN 0019-7939

Abstract

We examine the relationship between entrepreneurship and occupational licensure using data on the universe of over 700,000 tax preparers in the U.S. While extant research focuses on the downsides of occupational licensure for entrepreneurs, we argue that licensure may allow entrepreneurs to signal quality and may enhance their legitimacy. States with licensure have higher average rates of entrepreneurship—approximated by tax practice ownership—and, in high-income ZIP codes, more demand for paid preparer services. In our analysis of the introduction of a federal license in tax preparation in 2013, voluntary early adoption of the announced license among entrepreneurs predicts lower exit rates. Entrepreneurs are less likely to adopt the license early than non-entrepreneurs, unless they lack substitute state-level credentials.
Our results thus suggest that licensure represents a trade-off for entrepreneurs between the costs of compliance and the benefits of signaling quality and legitimacy.