Economic Inequality and Entrepreneurship: Micro Evidence from China

Research Summary This paper develops a theoretical explanation for why economic inequality may affect individuals' decision to engage in entrepreneurial activities. We argue that inequality may have a positive impact on entrepreneurship because it triggers social comparison, thus motivating individuals to become entrepreneurs. Moreover, such effect is stronger for people in the middle economic status group than for those in the top or bottom groups, as middle economic status group has both the motivation and capability to take entrepreneurial actions. We use a sample of 3,879 Chinese households from 2010 to 2018 and merge them with county-level variables to test our hypotheses. The results support our hypotheses and remain consistent across different model specifications, including models controlling for the potential endogeneity between inequality and entrepreneurship. Managerial Summary The rising economic inequality around the world has drawn widespread attention. Although inequality may not be desired, the optimistic takeaway from this paper is that inequality might also have a positive side by motivating entrepreneurial activities, especially for people from the middle economic class. While exerting continuous efforts to reduce poverty, governments could also properly treat the entrepreneurial spirit inspired by inequality and guide it to encourage entrepreneurship. From a dynamic point of view, emerging economies, when progressing toward a more liberal and market-oriented economy, might go through a period of time with increasing inequality. Thus different countries, due to their unique social and economic backgrounds, may not share one pareto optimal inequality ratio.