Entrepreneurship, Wealth, Liquidity Constraints, and Start-Up Costs
University of Quebec at Montreal (UQAM) - Faculty of Management (ESG); Rand Corporation; Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE)
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
Université du Maine; French National Center for Scientific Research (CNRS) - Centre d'Etudes Prospectives d'Economie Mathematique Appliquees a la Planification (CEPREMAP)
Comparative Labor Law & Policy Journal, Vol. 28, No. 4, 2007
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.
Number of Pages in PDF File: 38
Date posted: August 12, 2007 ; Last revised: November 16, 2008