Want More Entrepreneurs? Raise Welfare Benefits!

Over at the Atlantic, Walter Frick has a piece on the relationship between public welfare benefits and entrepreneurship.  The meme in the media is that the more generous the benefits, the greater the dependency, the less the initiative.  Logical, but according to some recent research, dead wrong:

Entrepreneurs are actually more likely than other Americans to receive public benefits, after accounting for income, as Harvard Business School’s Gareth Olds has documented. And in many cases, expanding benefit programs helps spur new business creation.

Take food stamps. Conservatives have long argued that they breed dependence on government. In a 2014 paper, Olds examined the link between entrepreneurship and food stamps, and found that the expansion of the program in some states in the early 2000s increased the chance that newly eligible households would own an incorporated business by 16 percent. (Incorporated firms are a better proxy for job-creating startups than unincorporated ones.)

Interestingly, most of these new entrepreneurs didn’t actually enroll in the food stamp program. It seems that expanding the availability of food stamps increased business formation by making it less risky for entrepreneurs to strike out on their own. Simply knowing that they could fall back on food stamps if their venture failed was enough to make them more likely to take risks. . . .

. . . . Contrary to claims by the right that welfare keeps immigrants from living up to their historic role as entrepreneurs, CHIP [the US government’s Children’s Health Insurance Program] eligibility increased those households’ chances of owning an incorporated business by 28 percent.

The mechanism in each case is the same: publicly funded insurance lowers the risk of starting a business, since entrepreneurs needn’t fear financial ruin. (This same logic explains why more forgiving bankruptcy laws are associated with more entrepreneurship.)

An interesting read.  The full post is here.

Tags: , , , , ,