Entrepreneurship and the Racial Wealth Gap

Abstract

Entrepreneurship promotes wealth accumulation. However, Black households face significant barriers, operating fewer and smaller businesses compared to White households. We propose and evaluate a general equilibrium model of entrepreneurship choice and wealth accumulation in which Black households experience adverse distortions as entrepreneurs and workers, both affecting entrepreneurship choice. We discipline the model using U.S. microdata, and find that it matches well the observed racial wealth gap and the correlation between wealth and entrepreneurship. We find that distortions faced by Black entrepreneurs are the key factor for understanding the average racial wealth gap and play a significant role in determining the median gap. Our analysis also indicates that addressing racial disparities in the U.S. can substantially increase output.

Keywords: Racial wealth gap, entrepreneurship, incomplete markets, wealth accumulation, financial frictions, Wealth inequality

JEL Classification: E21, J15, D31, D52