01 Mar 2015
Faculty Q&A: Less Risk, More Reward
Assistant Professor Gareth Olds on the business benefits of the social safety netby April WhiteTopics:
Your research explores entrepreneurship and the social safety net. What is the connection between those two things?
I look at whether stronger social safety net benefits make it more likely for people to start a business. For instance, there’s this large public health care program called the State Children’s Health Insurance Program [SCHIP] that was rolled out in 1997. Its goal was to insure children who were not covered by private insurance, but whose family income disqualified them from Medicaid. But I found that one of the secondary benefits was that newly eligible households were much more likely to have an entrepreneur in the family.
There are a couple of reasons why that might be, but most of the evidence seems to point to the fact that it’s not about people having the funds to start a business, it’s about the risk in their lives. When you’re thinking about kids’ medical expenses, it’s an extremely high risk.
So people with children were in this tough spot: They wanted to start a firm, but they were constrained because of this risk. Making a household eligible for SCHIP actually made them about 20 to 25 percent more likely to have a self-employed member in the family.
In another study, I found that households that became newly eligible for food stamps in an expansion that started around 2000 were about 20 percent more likely to have an entrepreneur in the family.
The social safety net can be a controversial issue.
There’s a lot of political rhetoric about the social safety net and “makers and takers,” which is this very attractively rhyming concept. There’s this idea that those are two separate populations—that they’re completely non-overlapping groups. In fact, that’s not the case. Depending on the program, about 25 percent of households that have a self-employed member receive some form of public assistance.
And in my research I found that the increase in entrepreneurship came with increased eligibility, not enrollment. I can’t say for certain whether people end up enrolling when they start a business, but in the narrow snapshot I got of these households, most of the families that started businesses were eligible but already had private insurance.
It’s not people trying to use the social safety net for personal gain; it’s people wanting to know something’s there in case they fall. It allows people to walk on that high wire.
How did you become interested in this topic?
I grew up on a lot of these programs. As a kid, my family was on Medicaid and food stamps. It gave me a firsthand experience with what being on these programs is like, and what they can help families do. My family ended up starting a small business when I was in my teens. I started to connect those two things when I was in grad school.
Are there larger lessons to be learned from your research about how to support entrepreneurship?
There’s a lot of emphasis on capital constraints for entrepreneurs. But when we think about access to credit, we’re only seeing half the story. The other half of the story is risk. That has nothing to do with the amount of capital I can raise. It has to do with the outside options I have in the very likely event that my firm fails. Am I going to be able to find a job? Do I have unemployment insurance? And am I going to be able to get health insurance for my kids?
Are there other ways the social safety net can benefit startups?
When we think about entrepreneurship, we tend to think about a founder or maybe a couple of partners. But they need a team, in many cases, if they want to grow. And when you’re thinking about joining a small firm, they can’t offer benefits; they can’t offer health insurance; they can’t even offer job stability. And in many cases, they pay with equity rather than with high wages.
That’s a very risky thing to do, to join a small firm. And you might imagine that when there’s a stronger social safety net, people are more likely to take on the risk of joining a small firm. It’s not starting a firm, but it’s an entrepreneurial spirit, being part of that startup culture, that small business culture.