The Relationship between Inequality and Entrepreneurship: A Conceptual Model and Preliminary Tests

Abstract

Inequality has recently been a topic of great social, political, and academic interest. We explore the entrepreneurial microfoundations of inequality, in terms of income and of quality of life. Specifically, we draw on the seminal work of Schumpeter and Kirzner to develop a two-process economic growth model that helps to explain the growing and shrinking trends of inequality. We argue that inequality is primarily the outcome of abnormal individual gains from successful entrepreneurship, as entrepreneurs create large shifts in the distribution of wealth in creative destructive processes. These shifts are temporary, however, as other arbitraging entrepreneurs take advantage of new innovations and compete away monopoly profits. Growing inequality trends, then, are the argued to be primarily the result of increasingly large (magnitude), but also shorter (duration), waves of creative destruction. Our primary contribution is conceptual. However, we also provide preliminary empirical support for our model from US state-level panel data over a six-year period.