High Income Inequality as a Structural Factor in Entrepreneurial Activity

Abstract

Statistical tests on a panel of data from 54 countries over the [2004][2005][2006][2007][2008][2009] period support the proposition that high income inequality and entrepreneurial activity share a positive linear relationship. In a novel approach, the dependent variable is defined from two independent and uncorrelated perspectives: (1) the World Bank Group Entrepreneurship Snapshot, which measures new business entry density based on secondary official sources; and (2) the Total Early Stage Entrepreneurial Activity of the Global Entrepreneurship Monitor project, which is a survey-based measure of formal and informal entrepreneurial participation rates. The empirical strategy is based on the logic that economies with increasing concentrations of wealth tend to encourage entrepreneurial activity because entrepreneurs accumulate more income than workers. Following the disequalizing model, once this inequality appears, it is reinforced in successive generations. The intuition behind this outcome is that a certain level of initial capital is required to establish a new enterprise, which implies that the probability of becoming an entrepreneur increases if an individual has inherited wealth.

Does income inequality sand or grease the wheels of entrepreneurial activity? International evidence

“…In other words, greater income inequality acts as a grease for entrepreneurship and this impact holds even after allowance is made for bi‐directional causality between entrepreneurship and income inequality. Our cross‐country results are consistent with earlier findings across U.S. states (Atems & Shand, 2018), and those with a smaller set of nations for an earlier period (Lecuna, 2014).…”

“…The authors find the presence of both positive and negative spatial spillovers. For a smaller sample of 51 nations, Lecuna (2014) finds a positive relation between income inequality and entrepreneurship. On the other hand, Atems and Shand (2018) use state‐level U.S. data from 1989 to 2013 and, employing GMM estimation, find a positive relation between income inequality and entrepreneurship.…”

Income inequality and entrepreneurship

“…These hypotheses extend Lecun as (2014) findings, which suggest that entrepreneurial activity benefits from moderate levels of inequality. However, different from Lecuna (2014), the three hypotheses explain income inequalities using three different measures of entrepreneurial activity as dependent variables instead of independent variables. Furthermore, the results presented here are based on a more extensive database, including the introduction of a quality measure of entrepreneurship (high-aspiration entrepreneurs).…”

“…The dependent variable in the analysis is income inequality and is measured by the Gini index, which is a scale ranging from 0 to 100 that calculates the degree of inequality in a country's income distribution (higher values indicate greater income inequalities). Following Lecuna (2014), four secondary sources of information were used: the Central Intelligence Agency World Factbook (CIA The World Factbook), the United Nations Development Programme indicators (UNDP), the United Nations University World Institute for Development Economics Research income inequality database (UNU-WIDER), and the World Bank (WB). The definitions and methodologies used to calculate the Gini index are practically identical among these four sources.…”

Does Inequality Foster or Hinder the Growth of Entrepreneurship in the Long-Run?

“…Although there are some international cross-country studies, these efforts have primarily provided simple correlations without testing (and correcting) for the likely presence of endogeneity between inequality and entrepreneurial rates. The lack of robust evidence thus limits our understanding of the effects that inequality might have (Lecuna, 2014;Lippman et al, 2005;Reynolds et al, 2005).…”