The Transition to Entrepreneurship: Human Capital, Wealth and the Role of Liquidity Constraints

Abstract:     
The importance of liquidity constraints as one of the main entry barriers to entrepreneurship has been recently put in question. Hurst and Lusardi (2004) show that the probability of transition to entrepreneurship is inelastic along most of the wealth distribution. They interpret this finding as evidence that wealth holding is not an important determinant of entrepreneurship. This paper challenges this view. I estimate a life cycle model of occupational choice that includes human capital heterogeneity, which generates a flat transition probability profile with respect to wealth. However, I show the shape of such aggregate relationship cannot be interpreted as evidence of the lack of liquidity constraints in the economy, but as the result of the optimal decisions of agents with different levels of human capital and assets within a cross-section. Moreover, quantitative analysis suggests higher credit constraints characterize better the data for the U.S. economy. Thus, these results imply wealth is a key element of the occupational decision at the individual level.

Number of Pages in PDF File: 47

Keywords: Entrepreneurship, human capital, wealth distribution, life cycle, transition probability

JEL Classification: M13, G11, J24

working papers series