Abstract
AbstractEconomic theories posit conflicting hypotheses on how wealth inequality affects entrepre-neurial dynamism. We investigate the impact of wealth inequality on business dynamics by constructing local measures of household wealth inequality based on financial rents, home equity, and 1880 farmland. We then identify the effect of wealth inequality on entrepre-neurship by instrumenting it with land distribution under the 1862 Homestead Act. Wealth inequality decreases firm entry and exit, and the proportion of high-tech businesses across metropolitan statistical areas. Wealth inequality also lowers the supply of public goods, such as education. Growth in income per capita consequently lags.
Highlights
Households’ wealth inequality is a defining societal characteristic with important implications for financial and real activity.1 The growth of wealth inequality during recent decades has returned the issue to the top of the agendas of policymakers and social leaders, but despite such renewed attention, economists are still far from reaching a consensus on its implications
We find that new establishments created in more unequal areas are more likely to be units generated by already existing firms than new ventures genuinely formed ex novo, and that establishments in unequal metropolitan statistical area (MSA) are more likely to be engaged in traditional rather than high-tech sectors
We find that wealth inequality comes with less provision of public goods considered important for business formation and economic growth
Summary
Households’ wealth inequality is a defining societal characteristic with important implications for financial and real activity. The growth of wealth inequality during recent decades has returned the issue to the top of the agendas of policymakers and social leaders, but despite such renewed attention, economists are still far from reaching a consensus on its implications. As our measures of wealth inequality are local (and because we know the location of new “establishments”—defined here as firms that are created), we can saturate our specifications with state, year, and/or state-year fixed effects to account for any unobserved heterogeneity at those aforementioned levels This procedure allows us to control for competing explanations of the deeply rooted determinants of institutions, such as individual states’ type of colonization and legal traditions (see Acemoglu, Johnson and Robinson (2001) and Berkowitz and Clay (2011), pp. More unequal MSAs are characterized by lower school expenditure per pupil, lower proportion of public school revenue obtained from local sources, and a more inefficient justice system These findings can explain the negative effect of inequality on entrepreneurship we document: a lower supply of public goods may deter entrepreneurs from setting up a firm in the first place.
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