High Income Inequality as a Structural Factor in Entrepreneurial Activity

Antonio Lecuna

doi:10.4067/S0718-27242014000100002

Authors

Antonio Lecuna Universidad del Desarrollo

DOI:

https://doi.org/10.4067/S0718-27242014000100002

Keywords:

Entrepreneurial activity, income inequality, institutions, Gini index

Abstract

Statistical tests on a panel of data from 54 countries over the 2004–2009 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.

Downloads

Download data is not yet available.

Author Biography

Antonio Lecuna, Universidad del Desarrollo

Antonio Lecuna is an assistant professor in the School of Business and Economics at Universidad del Desarrollo. His research interests are entrepreneurship, institutions, and Latin American Studies. Recent publications include ‘Corruption and Size Decentralization’ (Journal of Applied Economics, 2012) and ‘From Chavismo to a Democratic Left in Venezuela’ (Dissent, 2013).

Correspondence address: Ave. La Plaza 680, Las Condes, Santiago, Chile. Phone: +(56 2) 327 3777. Email: [email protected]

MANUSCRIPT

An approximation of the findings titled “Is high-income inequality the price that has to be paid to foster entrepreneurship?” was presented at the 8th Iberoamerican Academy Conference held in December 2013 in São Paulo.

References

ACS, Z., Amorós, J.E. (2008). Entrepreneurship and competitiveness dynamics in Latin America. Small Business Economics, 31(3), 305-322. DOI: http://dx.doi.org/10.1007/s11187-008-9133-y.

ALESINA A, Di Tella, R., MacCulloch, R. (2004). Inequality and happiness: Are Europeans and Americans different? Journal of Public Economics, 88(9-10), 2009-2042. DOI: http://dx.doi.org/10.3386/w8198.

AMORÓS, J.E. (2011). The Global Entrepreneurship Monitor project (GEM): a Latin-American context approach. Academia, Revista Latinoamericana de Administración, 46(1), 1-15. Available at: http://www.redalyc.org/pdf/716/71617238002.pdf.

AMORÓS, J.E., Cristi, O. (2008). Entrepreneurship and competitiveness development: a longitudinal analysis of Latin American countries. International Entrepreneurship and Management Journal, 4(4), 381-399. DOI: http://dx.doi.org/10.1007/s11365-008-0082-3.

BAPUJI, H., Riaz, S. (2013). Economic inequality and management. Human Relations, 66(2), 299-303. DOI: http://dx.doi.org/10.1177/0018726713478562.

BECKER, G., Tomes, N. (1979). An equilibrium theory of the distribution of income and intergenerational mobility. Journal of Political Economy, 87(6), 1153-1189. DOI: http://dx.doi.org/10.1086/260831.

BEDNARZIK, R.W. (2000). The role of entrepreneurship in U.S. and European job growth. Monthly Labor Review, 123(7), 3-16. Available at: http://www.bls.gov/opub/mlr/2000/07/art1full.pdf.

BLANCHFLOWER, D., Oswald, A. (1998). What makes an entrepreneur? Journal of Labor Economics, 16(1), 26-60. DOI: http://dx.doi.org/10.1086/209881.

BOSMA. N., Coduras, A., Litovsky, Y., Seaman, J. (2012). GEM Manual: a report on the design, data and quality control of the Global Entrepreneurship Monitor. Babson College, Babson Park; Universidad del Desarollo, Santiago; Universiti Tun Abdul Razak, Kuala Lumpur; Global Entrepreneurship Research Association, London.

CABANA-VILLCA, R., Cortes-Castillo, I., Plaza-Pasten, D., Castillo-Vergara, M., Alvarez-Marin, A. (2013). Análisis de las capacidades emprendedoras potenciales y efectivas en alumnos de centros de educación superior. Journal of Technology Management and Innovation. 8(1), 65-75. DOI: http://dx.doi.org/10.4067/s0718-27242013000100007.

FAIRLIE R, Krashinsky, H.A. (2012). Liquidity constraints, household wealth, and entrepreneurship revisited. Review of Income and Wealth, 58(2), 279-306. DOI: http://dx.doi.org/10.1111/j.1475-4991.2011.00491.x.

FREEMAN, S. (1996). Equilibrium income inequality among identical agents. Journal of Political Economy, 104(5), 1047-1064. DOI: http://dx.doi.org/10.1086/262051.

GALOR, O., Zeira, J. (1993). Income distribution and macroeconomics. Review of Economic Studies, 60(1), 35-52. DOI: http://dx.doi.org/10.2307/2297811

GENTRY, W.M., Hubbard, G. (2004). Entrepreneurship and household saving. Advances in Economic Analysis & Policy, 4(1), 1538-0637. DOI: http://dx.doi.org/10.2202/1538-0637.1053.

GHATAK, M., Jiang, N. (2002). A simple model of inequality, occupational choice and development. Journal of Development Economics, 69, 205–226. DOI: http://dx.doi.org/10.1016/s0304-3878(02)00059-7.

GUJARATI, D., Porter, D. (2010). Essentials of Econometrics. McGraw Hill, New York.

HINOJOSA MARTÍNEZ, S., Albornoz Pardo, C. (2013). Ganas de emprender y felicidad: un estudio exploratorio a partir del Global Entrepreneurship Monitor en Chile. Journal of Technology Management and Innovation. 8(1), 76-89. DOI: http://dx.doi.org/10.4067/s0718-27242013000100008.

HOLTZ-EAKIN, D., Joulfaian, D., Rosen, H.S. (1994a). Sticking it out: Entrepreneurial survival and liquidity constraints. Journal of Political Economy, 102(1), 53-75. DOI: http://dx.doi.org/10.1086/261921.

HOLTZ-EAKIN, D., Joulfaian, D., Rosen, H.S. (1994b). Entrepreneurial decisions and liquidity constraints. RAND Journal of Economics, 25(2), 334–347. DOI: http://dx.doi.org/10.2307/2555834.

KIMHI, A. (2010). Entrepreneurship and income inequality in southern Ethiopia. Small Business Economics, 34(1), 81–91. DOI: http://dx.doi.org/10.1007/s11187-009-9196-4.

KLAPPER, L., Love, I. (2010). The impact of the financial crisis on new firm registration. Working Paper No. 5444. World Bank Policy Research, Washington. DOI: http://dx.doi.org/10.1596/1813-9450-5444.

KRAUS S., Coen Rigtering, J.P., Hughes, M., Hosman, V. (2012). Entrepreneurial orientation and the business performance of SMEs: a quantitative study from the Netherlands. Review of Managerial Science, 6(2), 161-182. DOI: http://dx.doi.org/10.1007/s11846-011-0062-9.

KREUTZMANN, H. (2008). Dividing the world: conflict and inequality in the context of growing global tension. Third World Quarterly, 29(4), 675-689. DOI: http://dx.doi.org/10.1080/01436590802052433.

LJUNGQVIST, L. (1993). Economic Underdevelopment: The case of missing market for human capital. Journal of Development Economics, 40, 219-239. DOI: http://dx.doi.org/10.1016/0304-3878(93)90084-z.

LOURY, G. (1981). Intergenerational transfers and the distribution of earnings. Econometrica, 49(4), 843-867. DOI: http://dx.doi.org/10.2307/1912506.

MARQUARDT DW (1970) Generalized inverses, ridge regression, biuased linear estimation, and nonlinear regression. Technometrics, (12): 591-613. DOI: http://dx.doi.org/10.2307/1267205.

MARQUARDT, D.W. (1987). Collinearity and least squares regression: Comment. Statistical Science, 2(1), 84-85. DOI: http://dx.doi.org/10.1214/ss/1177013440.

MASON, C., Perreault, W.D. (1991). Collinearity, power, and interpretation of multiple regression analysis. Journal of Marketing Research, 28(3): 268-280. DOI: http://dx.doi.org/10.2307/3172863.

MEH, C.A. (2005). Entrepreneurship, wealth inequality, and taxation. Review of Economic Dynamics, 8(3), 688-719. DOI: http://dx.doi.org/10.1016/j.red.2005.03.001.

NAUDÉ, W. (2010). Entrepreneurship, developing countries, and development economics: new approaches and insights. Small Business Economics, 34(1), 1-12. DOI: http://dx.doi.org/10.1007/s11187-009-9198-2.

O'BRIEN, R.M. (2007). A caution regarding rules of thumb for variance inflation factors. Quality and Quantity, 41(5) 673-690. DOI: http://dx.doi.org/10.1007/s11135-006-9018-6.

OECD (1998). Fostering Entrepreneurship. Organization for Economic Co-operation and Development, Paris. DOI: http://dx.doi.org/10.1787/9789264163713-en.

QUADRINI, V. (1999). The importance of entrepreneurship for wealth concentration and mobility. Review of Income and Wealth, 45(1), 1–19. DOI: http://dx.doi.org/10.1111/j.1475-4991.1999.tb00309.x.

SCHUMPETER, J.A. (1934). The Theory of Economic Development. Harvard University Press, Cambridge (MA).

SHANE, S. (2009). Why encouraging more people to become entrepreneurs is bad public policy. Small Business Economics, 33(2), 141-149. DOI: http://dx.doi.org/10.1007/s11187-009-9215-5.

STATACORP (2009). Stata: Longitudinal Data/Panel Data Reference Manual. (Release 11). StataCorp LP, College Station (TX).

TAMVADA, J.P. (2010). Entrepreneurship and welfare. Small Business Economics, 34(1), 65-79. DOI: http://dx.doi.org/10.1007/s11187-009-9195-5.

UNDP. Available at http://hdrstats.undp.org/en/indicators/67106.html

UNU-WIDER. Available at http://www.wider.unu.edu/research/Database/en_GB/wiid/

VAN STEL, A., Carree, M., Thurik, R. (2005). The effect of entrepreneurship on national economic growth. Small Business Economics, 24(3), 311-321. DOI: http://dx.doi.org/10.1007/s11187-005-1996-6.

WHITE, H. (1980). A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica, 48(4), 817-838. DOI: http://dx.doi.org/10.2307/1912934.

WORLD BANK (2010). Entrepreneurship Snapshots 2010: Measuring the Impact of the Financial Crisis on New Business Registration. The World Bank Group, Washington. DOI: http://dx.doi.org/10.1596/978-0-8213-8476-3.

WORLD FACTBOOK. Available at https://www.cia.gov/library/publications/the-world-factbook/fields/2172.html.