A graph that shows the share of new entrepreneurs by individual income ranks

29.05.2024 | Research

High-income individuals are more likely to start a new incorporated business

A recent study by FIT’s researchers provides evidence on selection into entrepreneurship and the dynamic implications of establishing a new business, using detailed full-population data from Finland.

Entrepreneurs play a crucial role in generating growth, innovation and employment opportunities in modern economies. Despite a large literature on selection into entrepreneurship and differences in incomes between entrepreneurs and salaried workers, it is unclear who benefits from entrepreneurship. Does becoming an entrepreneur increase the incomes of those who are already well-off, or does it provide a “Stairway to Heaven” for those who come from less privileged backgrounds?

A recent study by Jarkko Harju (Tampere University, CESifo), Toni Juuti (Labore, Tampere University) and Tuomas Matikka (VATT Institute for Economic Research) provides evidence on selection into entrepreneurship and the dynamic implications of establishing a new business, using detailed full-population data from Finland.

The study shows that individuals at the very top of the personal income distribution are much more likely to start a new incorporated business compared to others. There is no similar selection based on parental income, but more than half of new entrepreneurs have entrepreneurial parents.

Entrepreneurship is associated with a similar average income gain of 20% relative to comparable wage earners throughout both personal and parental income distributions. However, key firm-level outcomes such as productivity and job creation are positively linked with personal income. This suggests that high-income individuals do not only benefit from entrepreneurship personally, but their businesses are associated with the largest positive spillovers in the economy. In contrast, the study finds no significant differences in the outcomes of new firms by parental income or parental background in entrepreneurship.

A graph that shows the share of new entrepreneurs by individual income ranks

The full text of FIT Working Paper 17 Stairway to Heaven? Selection into Entrepreneurship, Income Mobility and Firm Performance can be accessed via Publications.