Gigs and the Entrepreneurial Itch

Does the influx of sharing economy platforms such as Uber help or hinder innovation?
Gigs and the Entrepreneurial Itch

The essentials

  • A study exploring the link between sharing economy businesses and start-up activity found that UberX’s arrival in a market coincided with a drop in the number of local campaigns on the crowdsourcing site Kickstarter, by an average of 14 percent one year after UberX’s entry.
  • The effect was even stronger with on-demand delivery platform Postmates; a decline in entrepreneurship was observed just three months after Postmates entered the local market.
  • The majority of Kickstarter projects that disappeared were actually un-funded or under-funded campaigns. This suggests the entry of gig economy jobs leads to a drop in low-quality new ventures.

If you’ve requested a ride on Uber, posted your spare bedroom on Airbnb, or hired a local handyman to fix your sink on TaskRabbit, you’re aware of just how much the gig economy has affected daily life. Even if you haven’t used these disruptive platforms, you’ve likely read about how the entrance of sharing economy businesses can breed local creativity, innovation, and economic prosperity.

There’s solid logic to back up that assumption. After all, with a peer-to-peer business model, the gig economy provides a platform that allows anyone with a car, apartment, or marketable skills to earn extra cash. No job applications, the opportunity to set one’s own hours, and earn money as needed — such flexibility can allow a part-time Uber driver, for example, to work on her own start-up during off time.

Alternatively, some argue, the gig economy can have the opposite effect. Entrepreneurship can just as likely be born out of necessity as out of choice. Since unemployment often drives entrepreneurial pursuits, access to easy income and flexibility via Uber, Airbnb, and other sharing-economy platforms could actually reduce entrepreneurial activity by blunting the urgency to innovate.

Could the gig economy actually unwittingly be stifling innovation?

“What we don’t know about the gig economy is anything to do with supply,” says researcher Gordon Burtch of University of Minnesota. “Why do people choose to enter these markets as service providers? What else might they have been doing if the sharing platform hadn’t come along?"

Uber In, Kickstarter Down

Burtch, with Seth Carnahan (University of Michigan) and Brad Greenwood (Temple University), took a formal look at the complex relationship between the gig economy and entrepreneurship. He discussed the results of their research at the Economics of Entrepreneurship and Innovation Conference at Smith School of Business.

Their study focused on two sharing economy companies: Uber, an $8.2 billion driving service operating in 300 cities, and Postmates, a $138 million peer-to-peer delivery service in 28 markets. The researchers noted when UberX and Postmates entered local markets, then monitored the number of local campaigns that appeared on Kickstarter, the largest crowdfunding platform, in each region. Between 2013 and 2015, they tracked how the influx of these gig economy jobs affected entrepreneurship in different cities.

Burtch and his colleagues came to a double-sided conclusion. During a 21-month span — during which the researchers studied UberX’s entry into more than 50 cities — they found that UberX’s arrival coincided with a drop in the number of campaigns on Kickstarter, by an average of 14 percent one year after UberX’s entry. That decrease brought with it a loss of more than $7.5 million in fundraising requests during the 21 months alone, a substantial hit on total economic activity in local markets.

The effect was even stronger with Postmates, where the barrier to entry was simply a bicycle rather than a car. Declines in entrepreneurship were seen just three months after Postmates entered the market.

Clearing Out Weak Start-ups

To Burtch, however, that decline in entrepreneurship was to be expected. “Some people become entrepreneurs merely to resolve unemployment or underemployment, not because they see a good market opportunity,” Burtch says. “Gig economy jobs provide the option of full-time work with stable pay, perhaps making this a more attractive employment option.”

In his view, the decrease in entrepreneurship is not necessarily a black mark. Burtch and his colleagues found that the majority of Kickstarter projects that disappeared were actually un-funded or under-funded campaigns. Their conclusion: “The entry of gig economy jobs leads to the exit of low-quality ventures,” Burtch says. “These are people creating campaigns out of necessity, not because they see a good market opportunity.”

Gig economy jobs, then, are not complementing or competing against entrepreneurial ventures, as previously thought: they are replacing lower-quality ones. Overall, Burtch believes, that’s a good thing — for both entrepreneurs and the underemployed.

“The entry of gig economy jobs clears poorly performing projects from platforms like Kickstarter, enabling more efficient capital allocation,” he says. “They also provide employment opportunities for the un- or under-employed.”

Quite apart from the municipal regulatory issues surrounding gig economy platforms, Burtch’s research presents interesting findings for policy makers. While companies such as Uber and Postmates may cause a few job losses as they disrupt longstanding industries, they also provide benefits to many who have fewer options in the labour market. And they help clear out valuable crowdfunding platforms, allowing more worthy ventures to enter the spotlight, creating a win-win for both innovation and the unemployed. 

Kenza Moller

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