Entrepreneurship and Inequality: The Role of Incumbent Firms

65 Pages Posted: 19 Oct 2019 Last revised: 9 Dec 2019

See all articles by Francesco Castellaneta

Francesco Castellaneta

SKEMA Business School, Université Côte d'Azur (GREDEG)

Raffaele Conti

UCP-Católica Lisbon School of Business and Economics

Aleksandra Kacperczyk

London Business School

Date Written: July 1, 2019

Abstract

Using an exogenous variation in entry barriers, we develop and test a theory of wage inequality due to higher levels of startup entry. Researchers have argued that startups generate greater inequality in the labor market because new ventures lead to a higher within- and between-firm dispersion of wages. We propose an alternative explanation: a competitive response of incumbent firms to the threat of talent loss. When threatened by startup entry, incumbents will reallocate rewards among their own workers to prevent the loss of valuable employees to newly founded firms, thus generating greater wage inequality. We exploit a natural experiment provided by deregulation in Portugal and its effect on wage inequality between 1995 and 2009. Using a difference-in-differences methodology we find that, following an exogenous rise in the threat of startup entry, wage inequality increased. This threat further resulted in wider disparities in wages between high and low earners, as the former experienced greater increases in their bargaining power than the latter. Finally, increases in wage inequality inside incumbent firms were amplified in industries with higher rates of mobility to startups and greater human-capital intensity.

Suggested Citation

Castellaneta, Francesco and Conti, Raffaele and Kacperczyk, Aleksandra, Entrepreneurship and Inequality: The Role of Incumbent Firms (July 1, 2019). Available at SSRN: https://ssrn.com/abstract=3458845 or http://dx.doi.org/10.2139/ssrn.3458845

Francesco Castellaneta (Contact Author)

SKEMA Business School, Université Côte d'Azur (GREDEG) ( email )

France

Raffaele Conti

UCP-Católica Lisbon School of Business and Economics ( email )

Palma de Cima
Lisboa, 1649-023
Portugal

Aleksandra Kacperczyk

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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