The effect of inequality of opportunity on entrepreneurship: Evidence from China

Abstract

AbstractDespite the rich literature on income inequality, its impact on entrepreneurship is inconclusive, especially regarding the effect of different structures of inequality. In this research, we endeavour to explain such a phenomenon by formalising the inequality of opportunity. Utilising micro‐level data from China, we argue that it is inequality of opportunity that is negatively correlated with people's engagement in entrepreneurship, and this conclusion is consistent under a series of robustness checks. Our heterogeneity analysis indicates that the association between inequality of opportunity and entrepreneurship is stronger for self‐employment than for bigger‐scale private companies. It is also the strongest in regions with the lowest GDP per capita, the lowest fiscal expenditures and the smallest tertiary sector. These results suggest that economic development quality, economic structure and public service are important factors that influence the correlations between inequality of opportunity (IO) and entrepreneurial activities. Finally, we seek to understand the channels through which IO may be linked to entrepreneurship. Our results find that IO may discourage engagement in entrepreneurship by depressing human capital accumulation, access to credit, social capital and risk taking.