Wealth, Industry and the Transition to Entrepreneurship

Fordham University Department of Economics Discussion Paper No. 2008-09

33 Pages Posted: 12 Jun 2008

See all articles by Berna Demiralp

Berna Demiralp

Old Dominion University - Economics

Johanna Francis

Fordham University

Date Written: 2008

Abstract

Although the debate about the effect of wealth on entrepreneurship is now almost two decades old, there is little consensus among researchers about the significance of wealth as a determinant for self-employment. We re-visit the relationship between wealth and entrepreneurship using data from the National Longitudinal Survey of Youth. Like Hurst and Lusardi (2004), our results suggest the relationship between wealth and the probability of entering entrepreneurship is nonlinear. However, unlike Hurst and Lusardi, we find the probability of entrepreneurship increases at an increasing rate with wealth, starting at lower quantiles of the wealth distribution. We also observe that the aggregate relationship masks differences among entrepreneurs with respect to their industry. While high capital requirement industries and professional services display a convex relationship between wealth and the probability of self-employment, low capital requirement industries display a concave relationship. Since we find a positive relationship between wealth and the probability of entering entrepreneurship at lower quantiles of the wealth distribution, it is critical to check whether this relationship is caused by wealth endogeneity. In order to account for the possible endogeneity of wealth we instrument for wealth using changes in housing equity and the value of unexpected inheritances. The results of instrumental variable estimation reveal that there is no significant relationship between wealth and entering entrepreneurship for the full sample as well as for each of the three industries.

Keywords: Entrepreneur, wealth, industry, liquidity constraints

JEL Classification: E21, G11, J24

Suggested Citation

Demiralp, Berna and Francis, Johanna, Wealth, Industry and the Transition to Entrepreneurship (2008). Fordham University Department of Economics Discussion Paper No. 2008-09, Available at SSRN: https://ssrn.com/abstract=1143525 or http://dx.doi.org/10.2139/ssrn.1143525

Berna Demiralp

Old Dominion University - Economics ( email )

Norfolk, VA 23529
United States

Johanna Francis (Contact Author)

Fordham University ( email )

113 West 60th Street
New York, NY 10023
United States

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