Revisiting the Relationship between Income Equality and Entrepreneurship: A Social Trust Perspective

Although economic and entrepreneurship scholars have argued that high income inequality has a positive impact on entrepreneurship by increasing the incentives for high quality human capital to take entrepreneurial risk and by enabling talented entrepreneurs to accumulate and reinvest capital into new businesses, we suggest that the relationship between economic inequality and entrepreneurship may be more complex than initially indicated in light of recent research on the topic of social trust and entrepreneurship. We propose that income inequality is likely to have a curvilinear effect on entrepreneurial activity. Although moderate levels of inequality can increase entrepreneurial activity, very high levels of inequality will begin to reduce rates of entrepreneurship due to diminished generalized social trust in the community. Lower generalized social trust decreases the sharing of information and resources leading to fewer entrepreneurial opportunities, and as a result, lower levels of entrepreneurship.