CBR Briefing #59

Apr 02, 2018

Sections Economics

Why entrepreneurs don’t need subsidies
Financial success is only part of what motivates small-business owners

If more entrepreneurs are wealthy than poor, subsidies for small businesses would transfer resources from the poor to the wealthy.
  • Would small businesses grow faster if they weren’t cash strapped and burdened by government regulations? Some undoubtedly would; but for entrepreneurs starting a business largely for nonfinancial reasons, government subsidies could be regressive, benefiting the wealthy more than the poor, according to research by Chicago Booth’s Erik Hurst and Benjamin W. Pugsley at the Federal Reserve Bank of New York.
  • Past research by Hurst and Pugsley finds that a large share of US business owners were originally motivated by factors other than money—such as wanting flexible hours, or to be one’s own boss, or to pursue a passion (see chart).
  • The researchers used that insight to create a new model of the small-business sector. They find a positive correlation between small-business ownership and wealth, so that if more entrepreneurs are wealthy than poor, subsidies for small businesses would transfer resources from the poor to the wealthy.
  • The model also predicts that small businesses with largely nonfinancial motives will be concentrated in industries where companies don’t have to scale up, and where being small could be a competitive advantage.