Liquidity Constraints and Entrepreneurial Performance
Hans K. Hvide
University of Bergen - Department of Economics; University of Aberdeen - Business School; Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)
Norwegian School of Economics (NHH) - Department of Finance and Management Science; Statistics Norway - Research Department
CEPR Discussion Paper No. DP6495
If entrepreneurs are liquidity constrained and cannot borrow to operate on an efficient scale, those with more personal wealth should do better than those with less wealth. We investigate this hypothesis using a unique datset from Norway. Consistent with liquidity constraints being present, we find a strong positive relationship between founder prior wealth and start-up size. The relationship between prior wealth and start-up performance, as measured by profitability on assets, increases for the main bulk of the wealth distribution and decreases sharply at the top. We estimate that profitability on assets increases by about 8 percentage points from the 10th to the 75th percentile of the wealth distribution. This suggests an entrepreneurial production function with a region of increasing returns. Liquidity constraints may then stop entrepreneurs from being able to exploit a "hump" in marginal productivity. From the 75th to the 99th percentile returns drops by about 10 percentage points. This suggests that an abundance of liquidity may to do more harm than good.
Number of Pages in PDF File: 34
Keywords: Entrepreneurship, Household Finance, Private benefits, Start-ups, Wealth
JEL Classification: E44, G14, L26, M13working papers series
Date posted: June 2, 2008
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