Is Inequality Bad for Business : A Nonlinear Microeconomic Model of Wealth Effects on Self-Employment
It is widely assumed that pervasive credit market failures mean that a person's current wealth is critical to whether or not that person can take up opportunities to start a new business. The authors show that inequality in wealth can be eithe...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2001/01/888059/inequality-bad-business-non-linear-microeconomic-model-wealth-effects-self-employment http://hdl.handle.net/10986/19720 |
| Summary: | It is widely assumed that pervasive
credit market failures mean that a person's current
wealth is critical to whether or not that person can take up
opportunities to start a new business. The authors show that
inequality in wealth can be either good or bad for the level
of entrepreneurship in an economy, depending on how
diminishing returns to capital interact with borrowing
constraints at the microeconomic level. They use
nonparametric regression methods to study wealth effects on
business start-ups among migrants returning to their home
country, Tunisia. They include controls for heterogeneity,
with specification tests for the nonseparable effects with
wealth and for selection bias. There is no evidence of
increasing returns at low wealth. The aggregate number of
business start-ups is an increasing function of aggregate
wealth but a decreasing function of wealth inequality. In
other words, at any given mean, the higher the initial
inequality of wealth, the lower the rate of new business
start-ups, through the existence of diminshing returns to
capital given liquidity constraints. In this sense, the
results suggest that inequality is bad for business--but the
size of this effect is small. The findings do not constitute
a case for public redistribution of wealth as a means of
stimulating business activity. There should probably be more
research on interventions to reduce liquidity constraints. |
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