You wouldn't think a welfare system and entrepreneurship would have much to do with each other, especially for those who don't make use of the social safety net. But in two different papers, Harvard Business School professor Gareth Olds shows that access to welfare has a positive and dramatic impact upon entrepreneurship, and that people who become eligible for some form of government benefit are much more likely to become entrepreneurs than those who do not.

The first version of Olds' paper on entrepreneurship and food stamps was called Makers Versus Takers. "My PhD advisor said it was too incendiary, and that I should change it," says Olds. He switched to the slightly more staid "Food Stamp Entrepreneurs."

But Olds' work does exactly what you'd expect a paper called Makers Versus Takers to do: It redefines the election-era dichotomy popularized by Mitt Romney, and shows us that the relationship between makers and takers, especially as epitomized by entrepreneurs--perhaps the quintessential makers--is not what we presume.

Food stamps, health insurance, and startups

Olds studied two government programs in particular: the Supplemental Nutritional Assistance Program, better known as food stamps; and the State Children's Health Insurance Program, or SCHIP. The latter is designed to provide health insurance for children in families that don't qualify for Medicaid but can't afford private insurance. Income thresholds to qualify for SCHIP vary from $23,850 for a family of four living in Tennessee to $83,475 for that same family in New Jersey.

Both programs were expanded in the early 2000s, providing a natural experiment for Olds to study. He found that those who became newly-eligible for food stamps were 20 percent more likely to own a small business. The effect for SCHIP was even greater: Those who were newly-eligible for the benefit showed a 23 percent increase in self-employment.

Even more impressive, says Olds, is that the effects were even stronger when he looked only at participants that owned a company that was incorporated. About 12 percent of U.S. families own any type of business, but only about four percent own an incorporated firm, says Olds. So researchers often look at incorporated firms as representing a measure of seriousness and progress in business-building that isn't necessarily present in unincorporated firms. Yet eligibility for SCHIP led to a 31 percent increase in incorporated businesses, and eligibility for food stamps led to a 16 percent increase in those same businesses. "Not only were there more ventures, but there were more higher-quality ventures," says Olds.

Interestingly, most of the people who became newly-eligible for these government programs and became entrepreneurs did not actually sign up for the programs. So what Olds has really uncovered is evidence that just knowing some form of safety net is available is, in many cases, enough to push someone toward entrepreneurship.

Olds has several ideas about how this might work. In the case of food stamps, he notes that it's actually pretty hard to enroll in the program; the work requirements instituted in 1996 make it even tougher. "Food stamp enrollment as a percentage of eligibility is extremely low," says Olds. "Part of that is stigma." In that context, it's not surprising that would-be entrepreneurs may wait until they desperately need food stamps before applying to receive them.

The case of the various State Children's Health Insurance Programs is a little more complicated. Why would someone decline to sign their kids up for health insurance? Olds suggests that perhaps, in these families, a parent felt free to pursue their entrepreneurial dreams--even part-time--once they knew that, if they were successful, they could quit their day job and still have health insurance for their kids. After all, what's the point of working both a day job and a startup if you know that an inability to get health insurance for your family will prevent you from ever quitting your day job? Other families may have been more willing to rely on one partner's health insurance (rather than having two people with benefits-paying jobs) if they knew their kids would still have insurance if that person lost their job.

Olds says his results hint that access to startup capital may not be the only, or even the most important, roadblock for certain entrepreneurs. These entrepreneurs don't necessarily need cash. They need to insure against certain types of risk, such as the cost of medical care for a seriously ill child. Many relatively affluent startup founders, or those without family responsibilities, aren't too concerned about what would happen if their venture failed. They'll just go back and get another corporate job--one with benefits--or eat ramen for a bit longer. For Olds' entrepreneurs, by contrast, these worries loom large. For them, a social safety net may turn out to be extremely important--even if they never use it.

Published on: Sep 26, 2014