Navigating Moral Boundaries: How Entrepreneurs Manage Stigma Premiums in Morally Contested Markets

Entrepreneurship research has largely treated legitimacy as a resource that can be accumulated, implying that entrepreneurs in morally stigmatized markets should unequivocally pursue destigmatization. This assumption generates a puzzle: if legitimacy is universally beneficial, we should observe a uniform trajectory toward mainstream acceptance; however, entrepreneurs in contested markets such as cannabis, payday lending, and commercial surrogacy frequently resist normalization, opting out of licensing systems, opposing regulatory standardization, or reinforcing subcultural boundaries. We resolve this puzzle by theorizing that for entrepreneurs engaged in legally permissible but morally contested transactions, stigma functions as both a liability and a strategic asset. Drawing on the economics of repugnance and organizational stigma theory, we propose that moral disapproval simultaneously suppresses consumer demand and restricts competitive entry, generating a stigma premium for incumbents. We develop the concept of the strategic adjustment of moral stigma to explain how entrepreneurs manage this trade-off. We identify two primary strategic pathways: destigmatizing work, which is deployed when the level of stigma exceeds a viability threshold and threatens market survival, and maintenance-oriented work, which is deployed when the level of stigma erodes below a protection threshold and invites commodification. Five propositions specify the supply-side and demand-side mechanisms that govern strategy selection, linking moral stigma to entry rates, market demand, firm-level profitability, and entrepreneurial action. Our theory contributes to the entrepreneurship research by reconceptualizing stigma as a variable amenable to strategic adjustment, not only reduction, and by explaining when and why entrepreneurs in contested markets pursue seemingly opposing strategies.