Liquidity Constraints, Household Wealth, and Self-Employment: The Case of Older Workers
Julie M. Zissimopoulos
The RAND Corporation
Lynn A. Karoly
RAND Corporation - Santa Monica CA Offices
December 31, 2009
RAND Working Paper Series WR- 725
Evidence of liquidity constraints affecting entrepreneurship includes increasing rates of business formation with increases in household wealth and no relationship between the likelihood of business formation and wealth at high wealth levels. Using longitudinal data from the Health and Retirement Study on workers over age 50 and employing probit regressions with a non-linear specification of household wealth and liquid wealth, the authors find the relationship between wealth and business formation is consistent with this pattern. The paper also finds that wealth matters more for the formation of businesses requiring high starting capital. Employing the availability of a lump-sum distribution option (LSO) of an employer-provided pension plan as a new proxy for liquidity, the results show that workers with an LSO are more likely than workers with a pension and without an LSO to transition into self-employment. This provides further evidence of the existence and importance of liquidity constraints.
Number of Pages in PDF File: 32
Keywords: entrepreneurship, self-employment, liquidity constraints, pensions
JEL Classification: D31, L26
Date posted: January 10, 2010
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