Working Paper: CEPR ID: DP14643
Authors: Neil Lee; Andrés Rodríguez-Pose
Abstract: Entrepreneurship is sometimes portrayed as a cure-all solution for poverty reduction. Proponents argue it leads to job creation, higher incomes, and lower poverty rates in the cities in which it occurs. Others, by contrast, posit that many entrepreneurs are actually creating low-productivity firms serving local markets. Yet, despite this debate, little research has considered the impact of entrepreneurship on poverty in cities. This paper addresses this gap using a panel of US cities for the period between 2005 and 2015. We hypothesise that the impact of entrepreneurship depends on whether it occurs in tradeable sectors – and, therefore, is more likely to have positive local multiplier effects – or non-tradable sectors, which may saturate local markets. We find that entrepreneurship in tradeables reduces poverty and increases incomes for non-entrepreneurs. The result is confirmed using an instrumental variable approach, employing the inheritance of entrepreneurial traits as an instrument. In contrast, while there are some economic benefits from non-tradeable entrepreneurship, we find these are not large enough to reduce poverty.
Keywords: entrepreneurship; poverty; cities; economic development; USA
JEL Codes: M13; J21; J31; O18; R11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tradeable entrepreneurship (L26) | poverty reduction (I32) |
| parental entrepreneurship (L26) | children becoming entrepreneurs (L26) |
| tradeable entrepreneurship (L26) | incomes for nonentrepreneurs (E25) |
| nontradeable entrepreneurship (L26) | poverty reduction (I32) |