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Does institutional quality affect the relationship between income inequality and entrepreneurial activity?

Hazwan Haini (School of Business and Economics, Universiti Brunei Darussalam, Gadong, Brunei Darussalam)
Yazid Abdullahi Abubakar (College of Business Administration, University of Sharjah, Sharjah, United Arab Emirates)
Pang Wei Loon (School of Business and Economics, Universiti Brunei Darussalam, Gadong, Brunei Darussalam)

International Journal of Sociology and Social Policy

ISSN: 0144-333X

Article publication date: 19 December 2022

39

Abstract

Purpose

This study examines whether institutional quality affects the relationship between income inequality and entrepreneurial activity. The authors specifically examine whether the greasing or sanding effect holds for the relationship between income inequality and entrepreneurship, while moderating for institutional quality. The greasing effects suggest that income inequality can promote entrepreneurial activity, while the sanding effects disincentivise it.

Design/methodology/approach

The authors examine this relationship using a sample of 100 advanced and developing countries from 2006 to 2018 using a dynamic panel estimator to control endogeneity and simultaneity. Additionally, the authors include an interaction term to estimate the marginal effects of income inequality, while moderating for institutional quality. Furthermore, the authors differentiate between six measures of institutional quality.

Findings

Overall, the authors find that institutional quality and income inequality have a positive and significant impact on entrepreneurial activity. However, when moderating for institutional quality, the findings show that the marginal impact of income inequality is negative for countries with low levels of institutional quality. The authors show that the rule of law and government effectiveness are effective moderators in terms of magnitude. Furthermore, the authors find that the sanding effect of income inequality is observed in developing economies, even when moderating for institutional quality.

Research limitations/implications

The major limitation lies in the estimation of entrepreneurial activity, which is measured using new business formation. While this is commonly used, it focuses on formal entrepreneurial activities and overlooks the informal economy.

Originality/value

This study provides new empirical evidence on whether institutional quality can moderate and explain the puzzling link between entrepreneurial activity and income inequality.

Keywords

Acknowledgements

The authors acknowledge the direction of the editor, Professor Colin Williams, and the suggestions provided by three anonymous referees.

Funding: The authors received no direct funding for this research.

Declaration of conflicting interests: No potential conflict of interest was reported by the authors. The usual disclaimer applies.

Data availability statement: Data sharing is not applicable to this article as no new data were created or analyzed in this study.

Citation

Haini, H., Abdullahi Abubakar, Y. and Wei Loon, P. (2022), "Does institutional quality affect the relationship between income inequality and entrepreneurial activity?", International Journal of Sociology and Social Policy, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJSSP-10-2022-0254

Publisher

:

Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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