Household Inequality, Entrepreneurial Dynamism and Corporate Financing

Abstract

Economic theories provide conflicting hypotheses on how wealth inequality affects entrepreneurial dynamism and corporate financing. To empirically investigate its impact, we construct local measures of household wealth inequality based on financial rents, home equity, and 1880 farm land. We identify its effects on entrepreneurship by instrumenting it with land distribution under the 1862 Homestead Act or around US States removal of “death taxes”. Wealth inequality decreases firm entry and exit across MSAs, and is associated with a deterioration of credit, schooling, and justice. New businesses also create fewer jobs and income per capita consequently grows slower.