Study: Gig Economy's Arrival in a City Increases New Business Formation and New Business Loans, Especially In Cities with Challenging Socioeconomic Conditions

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Posted by Michael Mirsky on Friday, February 19th, 2021, 1:10 PM PERMALINK

A new study published by the National Bureau of Economic Research found that the arrival of the gig economy in a city is associated with an increase in entrepreneurial activity: The gig economy leads to increased new business registrations, increased new business loans, and increased Google searches directly related to starting a business.

The study noted the benefits are "particularly strong in cities with worse socioeconomic conditions, where policymakers may be especially interested in encouraging new entrepreneurial activity."

The study used “the arrival of the on-demand, platform enabled gig economy in the form of the staggered rollout of ride hailing in U.S. cities to examine the effect of the arrival of the gig economy on new business formation.”

This study is titled Launching With a Parachute: The Gig Economy and New Business Formation conducted by John M. Barrios of the University of Chicago and Yael V. Hochberg and Hanyi Yi of Rice University.

Entrepreneurs often finance themselves and bear the risk of failure. The arrival of the gig economy in a given city provides a positive spillover effect for entrepreneurs as a result of its flexible work hours and low entry barriers. 

While creating their framework, the researchers used several key measurements to gauge the effects of gig opportunities. The first of those measurements is the quantity of new business launches in areas where Ride Hailing services were introduced:

We estimate four models: column (1) presents estimates from the full sample period, column (2) shortens the sample pre period to post 2005, column (3) restricts to solely ever-treated cities, and column (4) uses only ever-treated cities, but with the sample post-2005. The second pair of models are meant to assuage concerns that any results might be driven solely by differences between ever-treated and never treated cities… Across all four models, we observe a similar pattern. The coefficient ranges from 0.03 to 0.06, depending on the sample employed, consistent with the arrival of the gig economy being associated with an increase of approximately 3 to 6% in new business registrations. 

The second measurement the authors used to collect their data is the quantity of loans given to newly registered businesses in cities with newly introduced Ride Hailing services:

We see that the emergence of the gig economy, in the form of entry of a RH platform, is associated with an increase in loans to new businesses, consistent with—and of a magnitude corresponding to—the increase in new business registrations.

The final measurement used by the authors to determine the influence of the gig economy is gauging entrepreneurial interest through an analysis of Google searches in cities where Ride Hailing services have recently been introduced:

We next turn to a measure which may capture interest in considering entrepreneurial entry more broadly: internet searches for terms and phrases directly related to launching a business—which we term entrepreneurial interest. In Figure 3, we explore the relationship between entrepreneurship search share and business registrations. Figure 3 presents a scatter plot of business registrations against search share for entrepreneurial terms, for the pre-ridehail subsample and the post-ridehail subsample. For both subsamples, the relationship is, as expected, upwards sloping. In the postridehail subsample, however, the slope of the relationship steepens. 

The researchers found two key conclusions. The first is that the gig economy spurs entrepreneurial activity, especially in "cities with worse socioeconomic conditions":

Our findings suggest that the gig economy plays a substantial role in spurring entrepreneurial entry ... by providing a potential income supplement to those who engage in entrepreneurial activity ...This benefit is particularly strong in cities with worse socioeconomic conditions, where policymakers may be especially interested in encouraging new entrepreneurial activity. 

Second, the researchers found that the gig economy serves as insurance against entrepreneurial-related income volatility:

Consistent with our conceptual framework, the models ... indicate that in cities with higher ex-ante economic uncertainty, the positive effects of the arrival of the gig economy are higher in cities with higher ex-ante economic uncertainty, translating into an additional 1 to 2 percentage point increase in new business registrations for a one standard deviation increase in ex-ante economic uncertainty, on top of the main effect. This bolsters the view that the gig economy provides insurance for would-be entrepreneurs.

The gig economy has been an important lifeline for many Americans, especially in the midst of a pandemic. As the country digs out from the economic damage from the pandemic, the gig economy will continue to play a vital role in new business formation and entrepreneurial activity.

Please see the full study here

 

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