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

Camilo Mondragon-Velez

International Finance Corporation - World Bank Group

December 17, 2007

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

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Date posted: March 23, 2010  

Suggested Citation

Mondragon-Velez, Camilo, The Transition to Entrepreneurship: Human Capital, Wealth and the Role of Liquidity Constraints (December 17, 2007). Available at SSRN: https://ssrn.com/abstract=1574487 or http://dx.doi.org/10.2139/ssrn.1574487

Contact Information

Camilo Mondragon-Velez (Contact Author)
International Finance Corporation - World Bank Group ( email )
2121 Pennsylvania Avenue, NW
Washington, DC 20433
United States
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