Inequality traps

Research question: Do historical levels of inequality and current business institutions affect the chances of new businesses being created and of these to survive and create jobs overtime?

The objective of this project is to examine the extent to which historical levels of inequality and current business regulation affect the likelihood of new businesses being created and of these to survive and create jobs overtime. For this purpose, we combine cross-country surveys on entrepreneurship with historical indicators of income inequality from the 1700s and 1800s and indicators of business regulation.

Since we are interested in estimating the impact of initial conditions on the dynamics of entrepreneurship, ideally we would want to follow the same firms over time. Unfortunately, empirically it is difficult to follow the same firms, due to attrition in panel surveys. We overcome this limitation by building a pseudo-panel of entrepreneurs using the Global Entrepreneurship Monitor (GEM) survey, the largest comparable dataset covering 70 countries over 2001-2009.

The GEM datasets are drawn from a new sample in each country every year. Thus, we build a pseudo-panel of cohorts of people based on their age and gender for each country following our earlier work in Gutiérrez-Romero (2012) and using the methodology was proposed by Deaton (1985).

We find that the income inequality prevailing in the 1700s or 1800s has a persistent and detrimental effect on the creation and survival of firms as well as job creation over time. Moreover, in countries with worse credit markets it is less likely that firms will be created, survive and create jobs over time.

To the best of our knowledge, this is the first empirical article that tests the predictions of Banerjee and Newman model (1993) and other similar theoretical models that suggest the wealth distribution prevailing in the distant past, can affect entrepreneurship and development in the long-run.

Working paper:

Gutiérrez-Romero, Roxana and Méndez-Errico, Luciana. (2015) The Long-Term Impact of Inequality on Entrepreneurship and Job Creation, Universidad Autónoma de Barcelona, Department of Applied Economics, Working Paper 15-01.