An Exploratory Cross-Country Analysis of the Relationship between Entrepreneurial Propensity and Income Inequality

In the extant literature, the effect of entrepreneurship on income distribution is ambiguous and entrepreneurial propensity in the form of new firm entry has not been addressed empirically. We develop a framework combining the Kirznerian and Schumpeterian views of entrepreneurship to illustrate the opposing income-distributive effects of new firm entry. Using data on 32 developing and advanced economies, we found income inequality (as measured by GGini coefficient) values are regressed on lagged values of firm entry rates. Income inequality is found to increase with the rate of new firm entry, with the effect being mitigated by rising levels of national income. Policy implications for developing economies are discussed.