Ability or Finances as Constraints to Entrepreneurship? Evidence from Survival Rates in a Natural Experiment
42 Pages Posted: 6 Jun 2011
Date Written: June 2011
We exploit a natural experiment to investigate why financial constraints appear to limit firm formation. Exogenous variation in wealth results from unexpected inheritance due to sudden death and allows us to identify 304 constrained entrepreneurs, who start a business after receiving windfall wealth. We compare the performance of these ventures to that of a matched sample of individuals who form businesses at the same time to test whether financial barriers to entrepreneurship are caused by market failure. We find that constrained entrepreneurs’ ventures have significantly lower survival rates and are less profitable than are those of unconstrained entrepreneurs. In addition, we show that windfalls have no long-term effect on survival rates of existing entrepreneurs. Collectively, these results suggest that the cause of the constraint is lower entrepreneurial ability rather than finances.
Keywords: entrepreneurship, ability, liquidity constraints, sudden death, inheritance
JEL Classification: J23, L26, M13
Suggested Citation: Suggested Citation