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This paper uses a spatial panel approach to examine the effect of the government-policy environment on the level of entrepreneurship. Specifically, we investigate whether marginal income tax rates and bankruptcy exemptions influence rates of entrepreneurship. Whereas previous work in the literature finds that both policies are positively related to entrepreneurship, we find non-monotonic relationships. Specifically, we find a U-shaped relationship between marginal tax rates and entrepreneurship and an S-shaped relationship between bankruptcy exemptions and entrepreneurship.(JEL J23, R12)