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Does income inequality sand or grease the wheels of entrepreneurial activity? International evidence

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  • Rajeev K. Goel
  • James W. Saunoris

Abstract

Using a large panel of countries, this research examines the influence of income inequality on entrepreneurship. The impact of income disparities on entrepreneurship is not clear a priori—with a positive effect when inequality encourages entrepreneurship (“greasing effect”) or a negative effect when entrepreneurship discourages entrepreneurship (“sanding effect”). Our findings, across alternative measures of income inequality and even allowing for simultaneity, are consistent with the motivation or greasing effect. An equally insightful finding is that the effect of inequality switches across the prevalence of entrepreneurship—the sanding effect exists in nations with a low prevalence of entrepreneurship, and switches to a greasing effect as the prevalence of entrepreneurship increases. This is suggestive of positive network externalities from entrepreneurship—it takes a threshold level of entrepreneurship in a nation for greasing from income inequality to take hold.

Suggested Citation

  • Rajeev K. Goel & James W. Saunoris, 2020. "Does income inequality sand or grease the wheels of entrepreneurial activity? International evidence," Australian Economic Papers, Wiley Blackwell, vol. 59(2), pages 138-160, June.
    • Handle: RePEc:bla:ausecp:v:59:y:2020:i:2:p:138-160
    DOI: 10.1111/1467-8454.12175
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    1. Michael A. Nelson & Rajeev K. Goel, 2023. "Spillovers from gender equality onto economic equality: Evidence from 162 nations," Journal of International Development, John Wiley & Sons, Ltd., vol. 35(6), pages 1365-1388, August.

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