Appetite for Destruction: The Impact of the September 11 Attacks on Business Founding Srikanth Paruchuri Associate Professor Warrington College of Business University of Florida Gainesville, FL 32611 Ph: 352-392-8128 Email:
[email protected] Paul Ingram Kravis Professor of Business Columbia University 3022 Broadway New York, NY 10027 Tel: 212-854-2740 Email:
[email protected] June 15, 2010 We are grateful to Heather Haveman, Felix Oberholzer-Gee, Peter Roberts, Elaine Romanelli, Brian Silverman, Olav Sorensen and David Weinstein for help and comments, and to CIBER for providing financial support. An earlier version of this paper was presented at the annual meetings of the Academy of Management in Philadelphia in August 2007. 1 Appetite for Destruction: The Impact of the September 11 Attacks on Business Founding ABSTRACT It is widely accepted that entrepreneurial creation affects destruction, as new and better organizations, technologies and transactions replace old ones. This phenomenon is labeled creative destruction, but it might more accurately be called destructive creation, given the driving role of creation in the process. We reverse the typical causal ordering, and ask whether destruction may drive creation. We argue that economic systems may get stuck in suboptimal equilibria due to path dependence, and that destruction may sweep away this inertia, and open the way for entrepreneurship. To test this idea we need an exogenous destructive shock, rather than destruction that is endogenous to the process of economic progress. Our identification strategy relies on the September 11 attacks as an exogenous destructive shock to the economic system centered on New York City. Consistent with our theoretical claim, we find fifteen months after the attacks, the rate of business founding close to New York City exceeds the rate before the attacks, even after controlling for the inflow of recovery funds.