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Entrepreneurship, Wealth, Liquidity Constraints, and Start-Up Costs

38 Pages Posted: 12 Aug 2007 Last revised: 16 Nov 2008

Raquel Fonseca

University of Quebec at Montreal (UQAM) - Faculty of Management (ESG); Rand Corporation; Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE)

Pierre-Carl Michaud

University of Quebec at Montreal (UQAM) - Department of Economics; Centre Interuniversitaire sur le Risque, les Politiques Economiques et l'Emploi (CIRPÉE); RAND Corporation, Labor and Population; IZA Institute of Labor Economics; Netspar

Thepthida Sopraseuth

Université du Maine; French National Center for Scientific Research (CNRS) - Centre d'Etudes Prospectives d'Economie Mathematique Appliquees a la Planification (CEPREMAP)

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Abstract

We study the effects of liquidity constraints and start-up costs on the relationship between wealth and the fraction of entrepreneurs in an economy. We develop a dynamic occupational choice model with endogenous wealth and entry into entrepreneurship. The model predicts that, with liquidity constraints, the probability of entering entrepreneurship is an increasing function of individual wealth while the introduction of start-up costs tends to flatten this relationship. The theoretical predictions can be tested on cross-sectional data with exogenous variation in liquidity constraints (e.g., access to credit) and business start-up costs. We use three highly comparable micro datasets (SHARE, ELSA, and HRS) providing harmonized data on wealth and work status in nine countries that characterized by very different levels of start-up costs and liquidity constraints. Our results support our theoretical predictions. While higher liquidity constraints yield a positive relationship with wealth profile for the fraction of workers in entrepreneurship, start-up costs weaken this relationship by depressing the marginal value of being an entrepreneur as a function of wealth. Countries with high start-up costs such as Italy, Spain, and France have flatter wealth gradients.

Suggested Citation

Fonseca, Raquel and Michaud, Pierre-Carl and Sopraseuth, Thepthida, Entrepreneurship, Wealth, Liquidity Constraints, and Start-Up Costs. Comparative Labor Law & Policy Journal, Vol. 28, No. 4, 2007. Available at SSRN: https://ssrn.com/abstract=1006252

Raquel Fonseca Benito (Contact Author)

University of Quebec at Montreal (UQAM) - Faculty of Management (ESG) ( email )

Case postale 8888
Succursale Centre-ville
Montreal, Quebec H3C 3P8
Canada

Rand Corporation ( email )

P.O. Box 2138
1776 Main Street
Santa Monica, CA 90407-2138
United States

Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE) ( email )

Pavillon De Sève
Ste-Foy, Quebec G1K 7P4
Canada

Pierre-Carl Michaud

University of Quebec at Montreal (UQAM) - Department of Economics ( email )

P.O. Box 8888, Downtown Station
Montreal, Quebec H3C 3P8
Canada

Centre Interuniversitaire sur le Risque, les Politiques Economiques et l'Emploi (CIRPÉE) ( email )

Pavillon De Sève
Ste-Foy, Quebec G1K 7P4
Canada

RAND Corporation, Labor and Population ( email )

Santa Monica, CA 90407-2138
United States

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Thepthida Sopraseuth

Université du Maine ( email )

72085 Le Mans Cedex 9
France

French National Center for Scientific Research (CNRS) - Centre d'Etudes Prospectives d'Economie Mathematique Appliquees a la Planification (CEPREMAP)

Ecole Normale Superieure
48 boulevard Jourdan
75014 Paris
France

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