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Start Your Business Entrepreneurs

Is the On-Demand Economy Helping or Hurting Entrepreneurship?

Is the On-Demand Economy Helping or Hurting Entrepreneurship?
Credit: Georgejmclittle/Shutterstock

On-demand services like Uber are becoming increasingly popular with consumers, but they're also having a significant impact on entrepreneurship, according to a new study.

Researchers at the University of Michigan, University of Minnesota and Temple University discovered that within one year of Uber and Postmates entering a new geographic location, entrepreneurial activity in those cities declined.

For the study, researchers first looked at what impact UberX had on Kickstarter campaigns. They found that 12 months after UberX started operating in a new city, the number of Kickstarter campaigns dropped by 14 percent.

The researchers attribute this effect primarily to the exit of lower-quality entrepreneurs, or those individuals whose businesses were more likely to fail. [See Related Story: Crowdfunding Your Startup? 3 Important Trends to Watch]

"We find that the reduction in campaigns mainly stems from a reduction in lower quality projects," the study's authors wrote. "Our interpretation of these results is that gig economy platforms allow individuals with lower opportunity costs to shift their efforts away from lower quality entrepreneurial projects and towards gig-economy employment."

The study's authors chose to look at Kickstarter data because, compared to more slowly moving metrics like taking out patents or founding companies, it is a measure that is quick to respond to changes in markets, and it offers researchers immediate visibility into both campaign and funding dynamics in the marketplace.

In addition to examining the impact of Uber's arrival on new businesses, researchers also analyzed what happened when the on-demand courier service Postmates entered a new location. Their findings were nearly identical to the results they obtained after looking at Uber.

The researchers believe that their work offers notable insights for policymakers who are debating the legality of services like Uber and Postmates.

"Although our results do not capture potential reductions in employment that may occur in the industries that are disrupted by the entry of a gig-economy platform, our results provide evidence that these platforms may provide employment opportunities for un- or under-employed individuals in other sectors," the study's authors wrote. "Policy makers may find it valuable to consider this potential benefit when deciding whether to accommodate these platforms."

While the number of projects on crowdfunding sites might drop when on-demand services enter a new location, the researchers believe that this is beneficial to the platforms in the long run.

The study's authors argue that the entry of gig-economy platforms appears to help reduce the clutter in the crowdfunding marketplace.

"To the degree that this reduces the cognitive burden and search costs imposed on crowd-financers, by elevating the overall level of quality on the platform and thereby reducing adverse selection, this should help to ensure the sustainability of the crowdfunding marketplace, because the crowd, facing a budget constraint, can focus its attention and wealth on higher quality campaigns," the study's authors wrote. "In contrast, in the absence of the treatment, it is more likely that capital will be temporarily tied up in campaigns that are of insufficient quality to ultimately succeed, cannibalizing potential contributions from more deserving campaigns."

The study was authored by Seth Carnahan, an assistant professor at the University of Michigan's Ross School of Business; Gordon Burtch, an assistant professor at the University of Minnesota's Carlson School of Management; and Brad Greenwood, an assistant professor at Temple University's Fox School of Business.

Chad  Brooks
Chad Brooks

Chad Brooks is a Chicago-based freelance writer who has nearly 15 years experience in the media business. A graduate of Indiana University, he spent nearly a decade as a staff reporter for the Daily Herald in suburban Chicago, covering a wide array of topics including, local and state government, crime, the legal system and education. Following his years at the newspaper Chad worked in public relations, helping promote small businesses throughout the U.S. Follow him on Twitter.