This study examines the causal relationships between inequality, poverty and entrepreneurship. We hypothesize that income inequality influences entrepreneurial activity, and entrepreneurial activity alleviates absolute poverty. Findings from longitudinal analyses of a dataset from all 50 US states over an 18-year period provide robust support for these hypotheses. Furthermore, the results suggest that antipoverty public policy aimed at encouraging work (i.e. Earned income tax credit, EITC) can be detrimental to entrepreneurial activity. These findings underscore the importance of linking public policy efforts aimed at poverty alleviation with those aimed at encouraging additional entrepreneurship.
Introduction
If the poor are abundant, wages will be low, which makes it much more tempting to be an entrepreneur who hires labor rather than a small-scale producer who works on his own. When the rich are relatively abundant, the opposite it true.
(Banerjee and Newman 1994, 214)
The notion that entrepreneurship is an engine for poverty alleviation in society has recently become more popular among scholars and policymakers (Zhara et al., 2009; Ahlstrom 2010; Al-Dajani et al., 2015; Banerjee and Newman 1994; Baumol 1990; Bruton, Ahlstrom, and Si 2015; Burns, 2012; Fairlie 2012; McMullen 2011; Ribeiro-Soriano 2017; Schumpeter 1934; Si et al. 2015.). Conventional wisdom dictates that entrepreneurial activity creates wealth in society (e.g. through employment and spillovers), which in turn increases the potential for poverty alleviation and economic growth in society (Fairlie 2005), although we would expect differences in these effects across countries depending on institutional considerations (Cullen, Johnson, and Parboteeah 2014; Nam et al. 2014; Tomizawa et al., forthcoming). These widely held views about the importance of entrepreneurial activity have fueled many government initiatives across the world aimed at fostering entrepreneurship (Nikolaev, Boudreaux, and Palich, forthcoming). Some notable examples include the $2 Billion Startup America White House initiative in the United States (US), the Chinese Government-backed $6.5 billion venture capital fund in China, and the Youth Enterprise Support (YES) government initiative in Ghana.
Extant research suggests that the broad determinants of entrepreneurial activity include the following factors: market conditions, education, finance, information, spillovers and agglomeration economies (Fairlie and Chatterji 2013; Koryak et al. 2015; Marlow et al. 2018); as well as institutional, legal and political factors such as taxation, intellectual property rights, start-up costs and failure costs (Djankov et al. 2002; Klapper, Laeven, and Rajan 2006; Klein et al. 2010; Nikolaev, Boudreaux, and Palich, forthcoming; Xue and Klein 2010). Nevertheless, research interest on the relationship between poverty and entrepreneurial activity from a management perspective is still at a nascent stage, with very limited empirical insights on the phenomenon (Beal and Astakhova 2017; Halvarsson, Korpi, and Wennberg 2018). Some of these recent efforts have yielded insights related to the functioning of entrepreneurial activities in base-of-the-pyramid (BOP) markets, especially in developing countries (Bradley et al. 2012; Hall et al. 2012; Prahalad 2004). Still, we lack a coherent empirical picture of the causal mechanisms that underlie the relationship between entrepreneurship and poverty. Specifically, it is unclear to what extent inequality may contribute to entrepreneurial activity. Or what mechanisms may enable entrepreneurial activity to impact poverty?
In this study, we focus attention on these related questions with the view to develop a coherent understanding of the complex relationship between entrepreneurial activity and poverty. Entrepreneurship is a complicated and multifaceted concept. We make two principal claims in our work. First, we suggest that income inequality actually has a positive impact on entrepreneurial activity by highlighting the tension between opportunity costs and entrepreneurial action (see first opening quote from Banerjee and Newman 1994). Second, we advance the notion of an entrepreneurial acti...
