Is Inequality Bad for Business? A Nonlinear Microeconomic Model of Wealth Effects on Self-Employment

We show that wealth inequality can be either good or bad for the level of entrepreneurship in an economy, depending on how diminishing returns to capital interact with borrowing constraints at the micro level. Non-parametric methods are used to study wealth effects on business start-ups amongst return migrants in Tunisia. Controls for heterogeneity are included, with specification tests for non-separable effects with wealth and for selection bias. There is no evidence of increasing returns at low wealth. The aggregate number of business start-ups is an increasing function of aggregate wealth, but a decreasing function of wealth inequality. However, even dramatic redistributions of wealth would not provide much stimulus to new business activity.