Why Do High-Income Parents Raise More Entrepreneurs?

I explore the origins of the positive association between socio-economic background and entrepreneurship. Using Finnish administrative data, I show that children from the top 1% of the parental income distribution are more than five times as likely to become business owners and almost three times as likely to become “real entrepreneurs”, who found new firms, as those from the bottom 50%. Similar patterns appear when using parental wealth instead of income, though the effects are somewhat smaller in magnitude. The strongest channel behind the over-representation of entrepreneurs from high-income families is prior experience of business ownership before founding new firms. I rationalize this finding by developing an “ownership ladder” model, where entrepreneurship is the second step on the ladder, and parental resources are associated with people stepping onto that ladder early. Furthermore, there are distinctive differences in the industries of the new firms by entrepreneurs’ parental background, which suggests that coming from prosperous origins is positively associated with human capital that provides entrepreneurial opportunities. The socio-economic background of entrepreneurs appears only weakly related to the initial equity of new firms, suggesting that liquidity constraints are not especially important. Nor can the selection pattern be explained by income shifting or shell companies. The performance of firms and the personal income development of entrepreneurs differ only slightly by socio-economic background. However, since business owners and entrepreneurs tend to earn much more than wage earners or the unincorporated self-employed, the highly non-linear selection patterns have major implications for intergenerational income mobility.