Liquidity Constraints and Entrepreneurial Performance

34 Pages Posted: 2 Jun 2008

See all articles by Hans K. Hvide

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)

Jarle Møen

Norwegian School of Economics (NHH) - Department of Business and Management Science

Date Written: September 2007

Abstract

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.

Keywords: Entrepreneurship, Household Finance, Private benefits, Start-ups, Wealth

JEL Classification: E44, G14, L26, M13

Suggested Citation

Hvide, Hans and Moen, Jarle, Liquidity Constraints and Entrepreneurial Performance (September 2007). CEPR Discussion Paper No. DP6495, Available at SSRN: https://ssrn.com/abstract=1138959

Hans Hvide (Contact Author)

University of Bergen - Department of Economics ( email )

Fosswinckelsgt. 6
N-5007 Bergen, 5007
Norway

University of Aberdeen - Business School ( email )

Edward Wright Building
Dunbar Street
Aberdeen, Scotland AB24 3QY
United Kingdom

HOME PAGE: http://hans.hvide.googlepages.com/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Institute for the Study of Labor (IZA) ( email )

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

Jarle Moen

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
5
Abstract Views
614
PlumX Metrics