Income inequality and entrepreneurship: Lessons from the 2020 COVID-19 recession.

We study entry into entrepreneurship during the COVID-19 recession of 2020 using new data from an extensive survey of more than 24,000 Spanish households, conducted between June and November 2020. We find that while the overall decline in the startup rate in 2020 was large, and of a similar magnitude as that during the Great Recession, the differential impact depending on ex ante income was starkly different. During 2020, the drop in firm entry was entirely concentrated among low- and medium-income households. We show that the entrepreneurship gap between these households and their high-income counterparts is not directly explained by social distancing, since it is mostly driven by the sectors not directly affected by lockdown measures, and it is larger among households that did not suffer a negative income shock during the pandemic. Our results instead indicate that high-income households performed relatively better during the COVID-19 recession because they had the means to exploit new business opportunities, thanks to their larger wealth and better access to external finance.

Dispositional optimism and business recovery during a pandemic.

A large literature at the crossroads of biology and cognitive psychology has shown that individuals hold generally positive expectations about future events. Despite this evidence, to date it remains unclear whether optimism has positive or negative implications for entrepreneurial activities. We examine this question in the context of the Covid-19 pandemic, which provides a unique way to study the role of optimism on the (in)ability of firms to overcome exogenous shocks. Using a large-scale longitudinal survey covering 1,632 UK firms, we find that entrepreneurs who score high on optimism were more likely to innovate and make organizational changes to their firms during the Covid-19 outbreak. Moreover, optimistic entrepreneurs experienced higher revenue growth during the pandemic. Collectively, our study sheds light on one of the psychological factors explaining why some firms can prosper and some others struggle in the wake of an external shock.