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.
In a revealing new study, Srikanth Paruchuri and Paul Ingram reverse the typical causal ordering, and ask whether destruction may drive creation. They 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, Paruchuri and Ingram needed an exogenous destructive shock, rather than destruction that is endogenous to the process of economic progress. Their identification strategy relies on the September 11 attacks as an exogenous destructive shock to the economic system centered on New York City. Consistent with their theoretical claim, Paruchuri and Ingram find that 15 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. Furthermore, the increase in the business founding rate after the attacks grows faster closer to Manhattan than it does further away from the epicenter of destruction.