A New Start: Opportunities and Barriers to Entrepreneurship for Returning Citizens — Damon J. Phillips, PhD, July 27, 2022

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Written testimony of Damon J. Phillips, a professor of management at the Wharton School of Business, prepared for a Senate Committee on Small Business and Entrepreneurship hearing on entrepreneurship for returning citizens and justice impacted individuals, scheduled for July 27, 2022. It reports research finding that 18.61% of returning citizens in a national longitudinal sample started businesses, against 11.48% of those never incarcerated, and that returning citizen entrepreneurs had 11.4% greater hourly earnings than those in employment. It states that returning citizens faced an unemployment rate of 27.3% in 2018 against 5.8% for the general public, and that first-year recidivism fell 12.6% for those entering entrepreneurship against 10.8% for employees. The testimony sets out financial, human and social capital barriers and recommends easing restrictions on government loans.

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Written Testimony for “A New Start: Opportunities and Barriers to Entrepreneurship for Returning
Citizens and Justice Impacted Individuals.” Scheduled for July 27, 2022.1
Senate Committee on Small Business and Entrepreneurship (Sen. Cardin, Chair; Sen. Paul, Ranking)

Damon J. Phillips, PhD
Robert Steinberg Professor, Professor of Management at Wharton School of Business
University of Pennsylvania Wharton School of Business and (by courtesy) Annenberg School for Communication
Senior Research Scholar, Columbia Business School


Thank you for this opportunity to share the latest research on this important topic. I am a professor at the
Wharton School of Business with over twenty years of experience including previous positions at Columbia
University and the University of Chicago. One of my areas of expertise is the relationship between
employment and entrepreneurship, with a specific focus on returning citizens and justice-impacted
communities. In 2016 I founded a program at Columbia University where MBA students go inside prisons
to teach business skills – including entrepreneurship. The program, called REAP (ReEntry Acceleration
Program)2 launched five years ago in partnership with Resilience Education3 and has touched hundreds of
individuals. A key reason we teach entrepreneurship was that our focus groups with returning citizens
revealed their desire for these skills. REAP is rooted in research that I conduct with my collaborator Kylie
Hwang (Ph.D.). This research, in addition to recent scholarship by Hwang, will be the focus of my
testimony.

THE CHALLENGE
With over 2.2 million people incarcerated as of 2018, the United States has the highest incarceration rate in
the world. This has led to more than 600,000 people per year reentering society from incarceration.
Successful reentry is the exception however, with the Bureau of Justice Statistics noting that over two-
thirds of returning citizens are rearrested within three years of reentry.4

The First Step Act of 2018 represents an important legislative achievement that will benefit individuals and
communities. At the same time, one of the persistent factors thwarting successful reentry is the
discrimination in the labor market faced by returning citizens. As of 2018, returning citizens suffer from an
unemployment rate of 27.3% compared to 5.8% for the general public.5 A recent Bureau of Justice Statistics
study on returning citizens from federal prisons found that a third of them found no employment at all over
the first four years post release. Moreover, no more than 40% of this cohort was employed at any one time
during this four-year window.6 And while one potential explanation is differences in human capital,
academic scholarship that adjusts for human capital differences continue to find that not only are returning

1
  This testimony shares collaborative work with Kylie Jiwon Hwang (Ph.D.), who is currently a Postdoctoral Fellow at Stanford
Graduate School of Business (https://kyliehwang.com/) as well as independent work by Hwang, K.J. (2022, forthcoming): "From
Prison to Entrepreneurship: Can Entrepreneurship be a Re-entry Strategy for Justice-Impacted Individuals?", The ANNALS of the
American Academy of Political and Social Science.
2
  https://www8.gsb.columbia.edu/socialenterprise/initiatives/reap
3
  https://resilience-education.org/
4
  Alper M, Durose MR, Markman J. 2018 update on prisoner recidivism: A 9-year follow-up period (2005-2014). Washington,
DC: US Department of Justice, Office of Justice Programs, Bureau of Justice Statistics; 2018 May.
5
  Couloute, L. and Kopf, D. 2018. “Out of Prison & Out of Work: Unemployment among formerly incarcerated people.”
https://www.prisonpolicy.org/reports/outofwork.html
6
  https://bjs.ojp.gov/content/pub/pdf/eprfp10.pdf
citizens less likely to be hired by employers, but those who are hired earn lower wages and experience less
wage mobility.7 This unemployment and underemployment in turn, fuels recidivism.8
RESEARCH ON RETURNING CITIZENS AS ENTREPRENUERS

In recent research, Kylie Hwang and I examined a potentially critical alternative to traditional labor market
participation: entrepreneurship. Entrepreneurship can be a response to labor market discrimination, where
justice-involved individuals start businesses in part to overcome barriers to employment.9 Our key study
has four notable findings: (1) returning citizens start businesses at a higher rate than Americans who have
never been incarcerated; (2) labor market discrimination is one key reason why returning citizens move
into entrepreneurship; (3) returning citizens earn more as entrepreneurs than they do as employees; and (4)
returning citizens have lower recidivism rates as entrepreneurs than they do as employees.

The Prevalence of Entrepreneurship for Returning Citizens
First, using data on thousands of Americans drawn from the U.S. National Longitudinal Survey of Youth
(NLSY97), we found that 18.61% of the returning citizens in our sample started businesses compared to
11.48% for those who had never been incarcerated. These results complement a recent RAND study, which
finds that over 1.1 million business owners in the U.S. have a criminal record. Moreover, over 1.7 million
employees are affiliated with businesses owned by someone with a criminal record.10

Entrepreneurship as a Response to Employment Discrimination
Second, we examined the relationship between entrepreneurship and employment discrimination by
looking at how entrepreneurship rates change when employment discrimination varies. We found that when
returning citizens experienced greater employment opportunities through lower discrimination, they were
less likely to start businesses. However, when employment discrimination was higher, entrepreneurship
rates increased. We also found that this effect is strongest for Black returning citizens.

Entrepreneurship and Income
Third, to determine the economic viability of entrepreneurship for returning citizens, we compared incomes
that returning citizens obtain from entrepreneurship to incomes from employment. Our research revealed
that returning citizens earn more as entrepreneurs than they do as employees. Specifically, we found that
returning citizen entrepreneurs had 11.4% greater hourly earnings compared to returning citizens in
employment. This finding is consistent with the argument that entrepreneurship mitigates the income
inequality that returning citizens experience in paid employment, as entrepreneurship provides greater
opportunities to earn based on one’s true productivity rather than depending on an employer’s biased
assessment of their productivity.11 And while returning citizens may also face barriers in entrepreneurship,

7
  Western, B. 2002. The Impact of Incarceration on Wage Mobility and Inequality. American Sociological Review 67 (4): 526–
46. Sugie, N.F. 2018. Work as foraging: a smartphone study of job search and employment after prison. American Journal of
Sociology, 123(5), pp.1453-1491. Harding, D.J., Morenoff, J.D. and Wyse, J.J., 2019. On the outside: Prisoner reentry and
reintegration. University of Chicago Press.
8
  https://www.science.org/doi/10.1126/sciadv.abj6992
9
  Hwang, K.J. and D.J. Phillips. “Entrepreneurship as a Response to Labor Market Discrimination for Formerly Incarcerated
People” Conditionally Accepted at American Journal of Sociology.
10
   Bushway, Shawn D., Dulani Woods, Denis Agniel, and David M. Adamson, Small Businesses, Criminal Histories, and the
Paycheck Protection Program. Santa Monica, CA: RAND Corporation, 2021.
https://www.rand.org/pubs/research_reports/RRA1295-1.html.
11
   Lippmann, S., Davis, A. and Aldrich, H.E. 2005. Entrepreneurship and inequality. Research in the Sociology of Work, 15, pp.3-
31. Hegde, Deepak and Justin Tumilson 2018, Asymmetric Information and Entrepreneurship, Working Paper.


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these barriers are not as overwhelming as the stigma of an incarceration record in the labor market. Overall,
our research suggests that entrepreneurship does more to reduce income inequality than employment for
members of the returning citizen community.

Entrepreneurship and Recidivism
Finally, we found that entrepreneurship decreases the likelihood of re-incarceration compared to
employment (and compared to unemployment), supporting the view of entrepreneurship as a way for
returning citizens to successfully reenter the society. In our study recidivism in the first year dropped by
12.6% for those entering entrepreneurship (compared to unemployment), compared to a drop of 10.8% for
those who were employees. This difference grows over time. For example, by year five recidivism for those
entering entrepreneurship dropped by 13.5% compared to a 7.9% drop for employment. These findings
were especially pronounced for Black returning citizens. Combined with the results on income, these
findings on recidivism suggest that entrepreneurship not only helps returning citizens improve their
economic well-being but also social integration. Our findings are consistent with the idea that
entrepreneurship yields greater economic and social incentives, such as responsibility, work satisfaction,
and the sense of publicly “making good”.12 The combination of these incentives reduces criminal activity.


LOWERING BARRIERS TO ENTREPRENEURSHIP FOR RETURNING CITIZENS13
Even though there are positive outcomes associated with entrepreneurship for returning citizens and their
communities, it is important to recognize that they also face significant barriers in starting businesses. Due
to these barriers, we may not be reaching the full potential of entrepreneurship as a path. In particular, one
can consider three types of barriers: financial capital, human capital, and social capital.

Financial Capital Related Barriers
Limited access to financial capital or funding is a primary obstacle facing justice-impacted entrepreneurs.
Funding can come from diverse sources, including personal funds, money from family and friends, credit
cards, commercial bank loans, or government funds. Yet these sources are often unavailable to
disadvantaged social groups. For example, justice-impacted entrepreneurs face obstacles to securing debt
caused by the mark of criminal history and the collateral consequences of incarceration.14 Moreover, people
who have been incarcerated are more likely to have insufficient credit scores and interruption in work
histories, both of which negatively impact the likelihood of qualifying for bank loans.15 Justice-impacted
individuals are also less likely to apply for bank loans than non-justice-impacted business owners because
of their fear of rejection.16
People with criminal histories have also face challenges gaining federal support or loans from government
agencies. For example, the Small Business Association (SBA), an important source of financing for many


12
   Maruna, S. Making Good: How Ex-Convicts Reform and Rebuild Their Lives. American Psychological Association.
Washington D.C.
13
   Research in this section draws from Hwang, K.J. (2022, forthcoming) "From Prison to Entrepreneurship: Can Entrepreneurship
be a Re-entry Strategy for Justice-Impacted Individuals?", The ANNALS of the American Academy of Political and Social
Science.
14
   Baskaran, P. (2019). Respect the hustle: Necessity entrepreneurship, returning citizens, and social enterprise strategies.
Maryland Law Review, 78(2), 323-381.
15
   Aneja, Abhay P. and Carlos F. Avenacio-Leon, 2017. Credit-driven crime cycles: the connection between incarceration and
access to credit. Unpublished. https://static1.squarespace.com/static/59dc0ec564b05fea9d3dfee3, 5, p.1513819887630.
16
   Rieple, A. 1998. Offenders and entrepreneurship. European Journal on Criminal Policy and Research, 6(2), pp.235-256.


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entrepreneurs, has a history of imposing restrictions on loans and other aids to business owners with
criminal records.17 Only in 2015 did the SBA Microloan Program change its criteria to allow loan
applications from people on parole or probation.18 More recently, the Paycheck Protection Program (PPP)
initially disqualified businesses whose owners had recent criminal histories. This initial restriction not only
hurt justice-involved entrepreneurs, but also those that these entrepreneurs employed.
In her doctoral dissertation, Hwang found that aspiring justice-involved entrepreneurs are more than 55%
less likely to obtain financial capital through either financial institutions or the government compared to
similar entrepreneurs with no justice involvement.19 In particular, African American and Hispanic
entrepreneurs with criminal records have the lowest rates of gaining capital from financial institutions or
the government, suggesting that the intersection of minority race and incarceration causes further
challenges. As a response to such financial barriers many justice-involved people resort to their personal
savings or family and friends for the capital to start new businesses. However, personal savings and funding
from family and friends is often constrained for justice-involved individuals due to poverty and low-income
levels.20 As a result, they often start businesses in industries that require minimal start-up capital and no
physical office.

Human Capital Related Barriers
Many justice-involved individuals lack the human capital necessary for entrepreneurship. The lack of
formal education can prevent the successful launching a business, especially in knowledge-based industries.
Consequently, individuals with criminal records start businesses where there is less need for advanced
formal education (e.g., construction). In addition to formal education, people with criminal records have
fewer opportunities to learn essential business skills such as economic literacy, skills in finance and
accounting, and business planning skills. Previous research shows that work experience, particularly
general full-time work experience and managerial experience, is one of the most important components of
human capital for entrepreneurs.21 As justice-involved individuals face even greater barriers to employment,
they are often unable to acquire the proper work experience that would lead to the type of human capital
associated with successful entrepreneurship. Thus, marginalization in the conventional employment market
has a spillover effect to barriers to succeeding in entrepreneurship for justice-involved individuals.

Social Capital Related Barriers
Justice-impacted individuals aspiring to entrepreneurship also face challenges due to having fewer
connections to role models or suitable business networks for peer support, investment, and business
opportunities.22 While the most helpful peers and mentors for potential entrepreneurs typically come from
work and post-secondary school, returning citizens and justice-involved individuals face a disadvantage as


17
   Bushway et al. (2021)
18
   Microloan Program Expanded Eligibility and Other Program Changes, 80 Fed. Reg. 34,043, 34,043 (June 15, 2015) (to be
codified at 13 C.F.R. pt. 120)
19
   Hwang, K.J., 2021. Entrepreneurship and incarceration (Doctoral dissertation, Columbia University).
20
   Robb, Alicia. 2013. Access to capital among young firms, minority-owned firms, women-owned firms, and high-tech firms.
Office of Advocacy, U.S. Small Business Administration, Washington, DC. Baskaran, P. (2019). Respect the hustle: Necessity
entrepreneurship, returning citizens, and social enterprise strategies. Maryland Law Review, 78(2), 323-381.
21
   Kim, P. H., H. E. Aldrich, and L. A. Keister. 2006. Access (not) denied: The impact of financial, human, and cultural capital on
entrepreneurial entry in the United States. Small Business Economics, 27: 5–22.
22
   Hwang, K.J. (2022, forthcoming) "From Prison to Entrepreneurship: Can Entrepreneurship be a Re-entry Strategy for Justice-
Impacted Individuals?", The ANNALS of the American Academy of Political and Social Science.


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many lack the educational networks or don’t have a viable path to the types of jobs that build social capital
for successful entrepreneurship. Families are another main source of social and cultural capital, however
many returning citizens are from families were financial and social resources are lacking or unhelpful for
entrepreneurship.

POLICY IMPLICATIONS
Research points to positive consequences of entrepreneurship for returning citizens and other justice-
involved individuals. At the same time, there are substantial barriers to entrepreneurship for these same
individuals. Fortunately, there is a role that the federal government can play in helping to mitigate some of
the barriers. Potential actions by government are discussed below, organized by financial capital, human
capital, and social capital.

Improving Financial Capital
Members of the Senate Committee on Small Business and Entrepreneurship have actively sought ways to
improve access to financial capital for small businesses, often with an eye to communities of color, rural
communities, and other marginalized groups. Similar to the way that restrictions were adjusted to PPP loans
in 2021, 23 and the Community Advantage Program in 2022, there is a continued role of government to
mitigate financial barriers to entrepreneurship for people with criminal histories. Reducing or removing
restrictions on government loans to people with criminal records would provide an important lifeline to a
group of Americans who often lack other sources of financial support needed to start and sustain their
businesses.

A second suggestion for improving access to financial capital is to consider tax incentives for investing in
businesses founded by justice-impacted entrepreneurs. These incentives can take the form of a tax deduction
through a non-profit vehicle. In this case, investors may be able to treat investments as a charitable
contribution. These tax deductions could also be structured as a part of a microloan program. Another
approach can be a tax incentive modeled on the way in which Qualified Small Business Stock (QSBS) limits
the extent to which an investor is taxed for capital gains, but expanded to include the types of businesses that
returning citizens are more likely to start (e.g., restaurants, smaller investment amounts). Under this second kind
of incentive, taxes on capital gains could be reduced or eliminated for business with justice-involved owners.
Correspondingly, tax law around losses on small business stock could be modified.

Improving Human Capital
Returning citizens also benefit from human capital for entrepreneurship. Returning citizens often report
challenges due to the lack of knowledge around applying for a loan, incorporation, accounting, financial
literacy, tax filings, as well as management and leadership skills when aspiring to start their own

23
  The original PPP disqualified businesses if any owner with 20 percent or more equity is: presently incarcerated, on probation, on
parole; subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought
in any jurisdiction; or within the last five years, for any felony, has been convicted; pleaded guilty; pleaded nolo contendere; been
placed on pretrial diversion; or been placed on any form of parole or probation (including probation before judgement). The SBA
subsequently reduced the scope of these disqualifications to: any felony conviction in the past year or a felony conviction related
to fraud, bribery, embezzlement, or a false statement on a loan or federal assistance application in the past five years; individuals
starting probation/parole within the last year or individuals starting probation/parole for the same offenses previously listed in the
past five years; and individuals presently charged with a criminal felony offense in June of 2020 (Small Business Administration
2020). In February 2021, the Biden administration eliminated the one-year restriction for those who were convicted but not
incarcerated (The White House 2021).


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businesses.24 Therefore, government agencies can aim to create new avenues for entrepreneurial training,
receive support services, and connections with funding opportunities. This should include in-prison
opportunities for business training and education. Some recent policy initiatives, like the NEW START Act
of 2019, seek to provide justice-involved individuals with entrepreneurial development assistance,
including the disbursement of microloans.25 The SBA is also collaborating with foundations such as the
Aspire Entrepreneurship Initiative (“AEI”), which provides “entrepreneurial education and microloans for
justice-involved individuals, with a specific focus on those who are parents.” The SBDC also has the
expertise on starting and running businesses and can build more ties to community-based organizations to
explicitly target justice-impacted entrepreneurs.
There has also been an increase of prison entrepreneurship training initiatives such as Texas’s PEP and joint
programs with non-profits or universities such as Resilience Education based in Virginia, Columbia
University’s REAP Program, and Georgetown University’ Pivot Program. These opportunities for
entrepreneurial education are only available in a handful of prisons or jails in the United States. Efforts to
provide more systematic, widespread, and continuous training inside prisons that is coordinated with
additional training after release can help address the lack of human capital.

Improving Social Capital
Initiatives to help returning citizens build social capital to start and succeed in entrepreneurship can address
the lack of connections to mentors, fellow entrepreneurs, customers, investors, and potential business
partners. Many of the aforementioned programs that provide human capital also provide social capital
(mentorship) as well. In addition, programs such as Defy Ventures and Inmates to Entrepreneurs, not only
provide microloans and training, but also facilitate connections to a cohort of aspiring entrepreneurs with
criminal records, mentors, and angel investors. Government support of initiatives to expand such programs,
including partnerships with organizations already active in this regard, would amplify already successful
entities (Resilience, Defy, PEP, Columbia) that that seek to scale their successes.

A FINAL NOTE
The work by the Senate Committee on Small Business and Entrepreneurship is critical to improving the
fate of small business owners in general, and those with criminal records in particular. And while initiatives
to promote and subsidize entrepreneurship as an alternative pathway for justice-impacted individuals is
important, it is also essential to achieve a balance with more traditional efforts to aid employment for
returning citizens. Entrepreneurship and employment are linked. One of the fundamental reasons why
entrepreneurship is prevalent among justice-impacted individuals is because of the challenges associated
with employment. Therefore, in addition to policies and programs to make entrepreneurship more
accessible as a career choice for justice-involved individuals, continuous efforts to address the ongoing
employment barriers and discrimination should be pursued with equal vigor.




24
  Rieple, A. 1998. Offenders and entrepreneurship. European Journal on Criminal Policy and Research, 6(2), pp.235-256.
25
    Necessary Entrepreneurship Workshops via the SBA to Transform and Assist Re-entry Training Act of 2019 or
the NEW START Act of 2019: This bill establishes a pilot program for providing entrepreneurial development assistance to justice-
involved individuals including the disbursement of microloans.




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