02 Sep 2014  Research & Ideas

Food Stamp Entrepreneurs: How Public Assistance Enables Business Bootstrapping

Gareth Olds finds a definitive link between an increase in access to government assistance programs and an increase in new company formation.

 

Gareth Olds grew up toeing the poverty line.

For years his parents struggled to support three children in Anchorage, Alaska, where food costs run high. His stepfather held down a steady but low-paying job as a dental assistant, and his mom performed a series of odd jobs. The kids pitched in. "Delivering phone books is the worst way to spend a Sunday when you're a kid," says Olds, now an assistant professor in the Entrepreneurship Management unit at Harvard Business School.

The family lived paycheck to paycheck. And yet, when Olds was a teenager, his parents garnered the nerve and bootstrapped the funds to launch a vocational training program for dental assistants. Revenue from the new business pushed them out of poverty and into the middle class. Olds, a budding economist, was intrigued.

"The rate of new business births rose by 13 percent among households that qualified for SCHIP. The survival rate of new businesses rose by 8 percent."

"They didn't have any experience starting a business, and they couldn't get a loan, because they didn't have the credit," says Olds, who joined the HBS faculty in July. "I wanted to know what it was that allowed them to save startup funds—and what allowed them to take the risk of launching a company."

Curiosity eventually led to his doctoral dissertation: a series of studies showing a definitive link between the social safety net and entrepreneurship. In short, Olds finds that an increase in access to public welfare services leads to an increase in the formation of new companies. (The paper cites a related example: author J. K. Rowling, who wrote the first Harry Potter novel while receiving welfare benefits in the United Kingdom.)

"Social insurance programs can promote entrepreneurship by reducing the risks of business ownership and relaxing credit constraints," Olds writes in the 2014 paper "Entrepreneurship and Public Health Insurance."

Studying the social safety net

Olds grew up on Medicaid, a Federal health insurance program for low-income individuals and families in the United States. At the same time, his family received food purchasing assistance from the Food Stamp program. He's pretty sure that these safety nets helped lead to the formation of his family's company. But while his personal experience motivated the idea for the study, he insists that it didn't shape the research.

"One family's story isn't an economics paper," he says. "People do get nervous if you have a personal story associated with your research. They worry you're bringing an emotional perspective to what should be a scientific endeavor. So a big part of my paper was convincing my advisers that what I was seeing was reproducible and scientifically valid. It also just happened to be personally valid for me."

"Having the net made these people more willing to walk on the high wire."

Olds focused his initial study on the State Children's Health Insurance Program (SCHIP). Established in 1997, the program provides health insurance to uninsured children in moderate-income families.

To research the link between SCHIP and entrepreneurship, Olds studied 1992-2011 data from the United States Census Bureau's Current Population Survey and Survey of Income and Program Participation. He compared data for households that fell just above the SCHIP income eligibility threshold with those that fell just below it, before and after the program took effect. This mimicked the effect of experimental treatment and control groups, a common research technique in cases when an actual experiment isn't practical or ethical. (In this case households that qualified for SCHIP were the treatment group.)

The data showed that SCHIP had a significant positive effect on entrepreneurship. The program increased the self-employment rate by 23 percent among eligible households compared with non-eligible households. The rate of new business births rose by 13 percent among households that qualified for SCHIP. The survival rate of new businesses rose by 8 percent.

Olds took care to find out whether the businesses were serious, sustainable endeavors. "Economists tend to think in terms of employment growth potential," Olds says. "What I found was that the largest area of growth was newly incorporated firms. Eligible households were 31 percent more likely to have an incorporated business than ineligible ones, which is larger than the effect when you consider all firms. This means the distribution shifted: There are more firms overall because of the policy, but there are proportionally more incorporated firms. These were new ventures that people were serious enough about that they were willing to take the significant step of incorporation."

He also discovered that the share of total household income from self-employment versus outside wages increased 16 percent. That is, these new businesses were successful enough to contribute significantly to household income. "The newly self-employed are working longer hours per week, and more weeks per year, and are making more money from these firms," Olds says. "These aren't dogs that shouldn't have been firms in the first place. These are people's dreams that they've been held back from before."

Food stamp entrepreneurs

Similar results bore out in a study of the link between entrepreneurship and eligibility for the Supplemental Nutrition Assistance Program (SNAP), which Olds details in the 2014 paper "Food Stamp Entrepreneurs."

His research examined what happened after a significant expansion of SNAP threshold levels in the mid-2000s, which loosened eligibility requirements such that more people qualified for the food stamp program. He found that newly eligible households were 20 percent more likely to include an entrepreneur as a result of the policy. Incorporated businesses ownership increased by 16 percent among the newly eligible.

The paper also addresses the common perception that public assistance leads to strategic sloth. "There's this fear that people go on the program and fudge the system so that they can stay on it," Olds says. "The concern is that people will deliberately keep their incomes low so that they can 'camp out' and keep the benefits."

As with his health insurance study, Olds acknowledges personal motivations for looking into the effects of SNAP. "I've never seen my mother working harder than when we were on Food Stamps, so I was skeptical that people would reduce their labor supply after receiving benefits," he says.

Studying Census Bureau data from 1996-2011, he found that the expansion of SNAP correlated with a 5 percent increase in the average length of a workweek. "I found no evidence of camping out," he says. In fact, many of the people in the study never actually took advantage of the public benefits programs for which they were newly eligible, Olds says. Yet they took the risk of starting new companies even though their budget constraints had not changed, and even though they never signed up for SCHIP or SNAP. It was enough just to know that the social safety net was in place.

"Having the net made these people more willing to walk on the high wire," Olds says. "It didn't make them want to walk on the net."

In the next stage of his research, Olds is researching how the social safety net influences the potential labor pool for start-up firms. Initial results indicate that public benefits provide risk assurance among start-up employees, too.

"Let's say I have a comfortable management position at a large firm, but I'm thinking of taking a chance on joining a new small business," Olds explains. "I want to get in on the ground floor of what could become a wildly successful company, but I also want to make sure my kids have health insurance. If I have this outside option, if I have access to public health insurance, then I'm more likely to join. The founders of the next Google or Facebook are happy because they can get good labor. And the new employee is happy because the safety net is there."

About the author

Carmen Nobel is senior editor of Working Knowledge.

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Comments

    • margaret
    • president, Deventis Conseil

    This phenomenon is well-known in French venture capital circles. French entrepreneurs use their unemployment benefits to start new businesses, so much so that we nick-name it "Assedic Ventures" after the body providing these benefits. Many of these entrepreneurs would never have received bank credit, so it seems a decent recycling of public funds.

     
     
     
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited

    Having such sefety nets is indeed advantageous for entrepreneurs as these foster their growth. In India, we do not have any such facilities directly. Some social initiatives are provided by a few companies/ philanthophists but this is once a while and not with government support generally.

     
     
     
    • Kathryn Alexander
    • Founder, Art Of Leadership - Impact!

    What a wonderful look at a very persistent bias! This is a great example of putting "belief" to the test and finding it wanting. This is clear evidence for a better understanding of who humans really are and confronts the illusion that people are lazy and good for nothing. Now, the question is will people change their minds or hang on to their cherished beliefs - beliefs that help rationalize greed! Great work!

     
     
     
    • Robert Hacker
    • Managing Partner, GH Capital Partners

    Government assistance is not the relevant factor in the analysis described in the article. Any of the many factors that reduce the risk of cash flow uncertainty spawn increased entrepreneurship. Isn't this what Mohammed Unus proved with his work in micro-finance, which involved no government assistance. More examples at http://sophisticatedfinance.typepad.com/sophisticated_finance/2014/09/understanding-the-risk-of-entrepreneurship.html

     
     
     
    • John

    I wonder if the increase in entrepreneurship was the result of something else besides eligibility for SNAP enrollment. Imagine that you are such a person, newly eligible for SNAP since you lost your job (which happened to many highly educated potential entrepreneurs during the recession). You likely have been looking for a new job but have not been able to find one due to the recession. Rather than continuing to look for a job that is not there, you become more likely to consider entrepreneurial options. Thus, is the real cause of the increase becoming eligible for SNAP, or is it the lack of available jobs? Said another way, is it possible that necessity is the real mother of entrepreneurial invention and eligibility for SNAP benefits mostly a coincident event? Of course we can always use statistics to help us believe what we want to believe....

     
     
     
    • Mike
    • Manager, Major Airline

    This article doesn't make sense. Olds contridicts his study. he states that the social welfare/safety net make it possible for people to start new businesses. Suggesting they wouldn't do so without the "safety net". Yet his study suggests many of the people in his study never actually use the benefits. "I found no evidence of camping out," he says. In fact, many of the people in the study never actually took advantage of the public benefits programs for which they were newly eligible, Olds says. Yet they took the risk of starting new companies even though their budget constraints had not changed, and even though they never signed up for SCHIP or SNAP. It was enough just to know that the social safety net was in place.

    "Having the net made these people more willing to walk on the high wire," Olds says. "It didn't make them want to walk on the net."

    This is a serious assumption on his part. there is no correlation between the business owner's financial standing and their WILLINGNESS and WORK ETHIC required to start a new business. There is absolutely no way to determine the motives of these participants. If the public welfare was not available he is suggesting they would NOT have created the business. This is absurd. It is my experience that just the opposite is true. Those people with the determination and desire to succeed find a way regardless of their current situation. The very fact that many of the participants in his study did not receive welfare suggests to me that success is derived from personal ambition, work ethic, and character, not from availability of public welfare. I think his assertion/thesis is insulting to the hard working people he cites in this "study".

     
     
     
    • Mike
    • Restaurant Owner, Sorrento Restaurant

    I think it is more of a nothing to lose mindset that motivates us to try something. I lost everything a decade ago but, my boys were still young and I was afraid to take a chance. I took a low paying job in the security field and lived paycheck to paycheck so we could have food on the table and health insurance. When the boys became adults I went into action and opened a restaurant using credit cards (not recommended) and I am now starting to cash a paycheck, employ one son and created jobs for 5 other people. The so-called safety net does not help it hinders most people from going after their dreams, always afraid it will be taken away because you made $5 to much. The system is designed to keep you dependant, your not allowed to have money saved and if you try to get ahead working 7 days a week at three jobs for a total of 90 - 100 hours a week you don't get overtime and you lose all government help. Governments like to control people and this is the way they came up with in the US, they tie federal funds to each community based on controlling the people, from seatbelts to healthcare. Government intervention is the worst thing for people. Federal government should try to to the job they are there to do, not get involved in peoples everyday life. Protect our borders, settle disputes amongst the states, maintain free and fair commerce.