The Impact of Economic Inequality on Entrepreneurship: Does a Society’s Stage of Development Make a Difference?

Abstract

In recent studies linking inequality to the entrepreneurial process, some scholars claim that inequality creates entrepreneurial incentives, thereby increasing entrepreneurship, while others contend that inequality deters entrepreneurship by restricting market opportunities. Building on Kuznets’s inverted- U hypothesis on the inequality–development relationship, I posit that the nature of the inequality–entrepreneurship relationship is contingent on a society’s development level. Results from mixed-effects logistic regressions and 60 countries support this argument. Although inequality increases entrepreneurship overall, the results of this study show a curvilinear relationship between the inequality–entrepreneurship association and development. That is, the inequality–entrepreneurship association is weak at low levels of development, strengthens as development increases from low to intermediate levels, and lessens again at advanced development levels. I discuss the implications of these findings for future entrepreneurship research and policy initiatives aimed at mitigating adverse impacts of inequality on social welfare.