A significant gap exists in entrepreneurship theory, which suggests that people with high but unobservable skills often turn to entrepreneurship when employers can't accurately assess their talent. While this idea makes logical sense, there's little concrete evidence showing how sudden changes in employers' ability to evaluate talent—like new hiring regulations or technology shifts—affect entrepreneurship rates. Studying these "information shocks" could provide valuable insights into labor market dynamics and why people start businesses.

How Information Shocks Influence Entrepreneurship

One way to explore this would be to identify specific events that disrupt how employers evaluate talent—such as laws banning salary history questions or the rise of AI hiring tools. These shocks could then be analyzed to see if they lead to more people starting businesses in affected industries or regions. For instance, comparing entrepreneurship rates before and after a regulatory change, using methods like difference-in-differences, could reveal whether the shock had a measurable impact. Additionally, examining if high-skill individuals (measured through proxies like prior income or education) were more likely to become entrepreneurs post-shock would test the core theory.

Who Benefits and Why It Matters

This research could benefit several groups:

• Researchers: Would gain empirical evidence to refine entrepreneurship and labor market theories.
• Policymakers: Could design better labor regulations if they know how evaluation methods influence entrepreneurship.
• Employers: Might adjust hiring practices if they see certain methods drive talent away.
• Potential Entrepreneurs: Could better understand how labor market frictions shape their opportunities.

How This Compares to Existing Research

Existing studies often look at static traits (like education) that predict entrepreneurial success, but they don't explore how sudden changes in hiring practices affect entrepreneurship. One 2021 study, for example, examined "ban-the-box" laws that hide criminal records but didn't generalize to other types of shocks. This idea would take a broader approach, analyzing multiple kinds of evaluation disruptions—regulatory, technological, or even public perception shifts—to uncover a clearer link between labor market frictions and business creation.

By starting with a focused case study—such as a single regulatory change—researchers could quickly test the idea before scaling to more complex scenarios. The findings could then inform businesses, policymakers, and workers about how shifts in hiring practices influence who chooses entrepreneurship and why.