Occupational Licensure and Entrepreneurs: The Case of Tax Preparers in the U.S.

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.

Too Good to Hire? Capability and Inferences about Commitment in Labor Markets

“…A candidate’s capability may be used for such an inference, as it is more readily ascertained from past experience indicated on a résumé, formal educational credentials, and professional licenses and certifications (Albert, Galperin, and Kacperczyk, 2018), or during a tryout period (Sterling and Fernandez, 2018). In the labor market context, capability may thus serve as a signal of commitment (or lack of it) to an employer, and the perceptions of capability and commitment move in opposite directions: above some necessary threshold, higher levels of capability lead to less favorable perceptions of a candidate’s commitment.…”