The effects of entrepreneurship on income inequality in developed countries: in search of mechanisms

Abstract This paper contributes to exploring mechanisms through which entrepreneurship can reduce income inequality in developed countries. During the 2000s, higher-quality (opportunity-driven, growth-oriented, or innovative) entrepreneurship reduced inequality by diminishing the income share of the upper tail. A possible mechanism is Schumpeterian creative destruction. Entrepreneurs may have challenged the market power of incumbent firms, reducing their markups and the remuneration of their owners and managers. Higher-quality entrepreneurship additionally increased the income share at the lower tail. A possible mechanism is job creation. Entrepreneurs may have offered poor, low-skilled workers additional employment opportunities. During the 2010s, the effect of opportunity entrepreneurship on income inequality vanished, however. It neither reduced the top nor increased the bottom income shares. This hints toward a declining role of both creative destruction and job creation. Necessity entrepreneurship has not affected income inequality during the entire period.