Household wealth inequality, entrepreneurs’ financial constraints, and the great recession: evidence from the Kauffman Firm Survey

Abstract

We empirically test if household wealth inequality affects borrowing constraints of young entrepreneurs. We construct a measure of wealth inequality at the US county level based on the distribution of financial rents in 2004. We find that in more unequal areas, entrepreneurs are less likely to apply for a loan fearing that their applications will be turned down and they use more of their own funds to finance their ventures. In more unequal areas, the number of bank establishments per capita is lower, this effect being stronger during the 2007-2008 financial crisis.

Rising Inequality and Entrepreneurship during Economic Downturn: An Analysis of Opportunity and Necessity Entrepreneurship in Spain

“…Indeed, this study provides new statistical evidence about the relationship between economic inequality and entrepreneurial activity, but above all it provides novel insights into the mechanisms through which inequality can affect entrepreneurial activity in the context of an economic downturn. This particular emphasis is of particular interest as the results of our analysis show significant differences to some of those in the current literature [6,8,9], although they corroborate with the results of others [7]. We find a negative relationship between income inequality and both opportunity-and necessity-driven entrepreneurship.…”

“…One possible explanation for this phenomenon is suggested by the fact that the decrease in entrepreneurial activity in European territories was more pronounced in regions where access to finance was more difficult (i.e., southern EU) [34]. Researchers agree that one major negative impact of the Great Recession on business start-ups was the increased difficulty in accessing finance from banks, venture capitalists or angel investors [7,29]. Examining the effect of inequality on entrepreneurship during the subprime crisis in the United States, Braggion et al [7] conclude that, holding everything else constant, in more unequal counties, startups tended to be most frequently financed with entrepreneurs' own resources.…”

“…We find a negative relationship between income inequality and both opportunity-and necessity-driven entrepreneurship. Drawing on the literature [7,16], we argue that rising wealth inequality across the Spanish regions during the Great Recession led to increasing financial constraints on entrepreneurs.…”

“…Formal institutions are examined in comparative entrepreneurship research chiefly in terms of institutional economics, while in the case of informal institutions the prevalent approaches are cultural sociology and cross-cultural psychology [4]. Among the institutional factors related to inequality which have been studied as determinants of entrepreneurship are capital markets, wealth transfer and labor market policies [6,7].…”

“…In a similar fashion, a growing number of recent works delve into the consequences of rising economic inequality for entrepreneurial activity [6][7][8][9][10]. Braggion et al [7] focus on the effects of income inequality on entrepreneurs' financial constraints, finding empirical evidence that entrepreneurs in areas of inequality are less likely to apply for loans from fear of being turned down, and instead rely more on their own equity to set up a business. The authors conclude that wealth inequality is a relevant factor to be taken into account when considering the financial constraints on entrepreneurs.…”