Mortgage Debt and Entrepreneurship

54 Pages Posted: 14 Oct 2015 Last revised: 17 Oct 2015

See all articles by Philippe Bracke

Philippe Bracke

Bank of England - Structural Economic Analysis Division; London School of Economics & Political Science (LSE)

Christian A. L. Hilber

London School of Economics (LSE) - Department of Geography and Environment; London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP); Spatial Economics Research Centre (SERC)

Olmo Silva

London School of Economics & Political Science (LSE) - Department of Geography and Environment; London School of Economics (LSE) - Centre for Economic Performance; Institute for the Study of Labor (IZA)

Date Written: October 9, 2015

Abstract

We study the link between mortgage debt and entrepreneurship using a model of occupational choice and housing tenure in a setting where homeowners do not default on their debt. Our model predicts that, as long as the mortgage interest rate exceeds the rate of interest on liquid wealth: (i) mortgage debt, by amplifying risk aversion, diminishes the likelihood of entrepreneurship; and (ii) the negative relation between leverage and entrepreneurship increases with income volatility. Our model also shows that the link between housing wealth and entrepreneurship is ambiguously signed because of competing portfolio and hedging effects. Using the British Household Panel Survey, we test and confirm the model’s predictions. A one standard deviation increase in leverage reduces the probability of entrepreneurship by 10%-12%.

Keywords: Entrepreneurship, mortgage debt, leverage, risk aversion

JEL Classification: L26, D14, G11, R21

Suggested Citation

Bracke, Philippe and Hilber, Christian A. L. and Silva, Olmo, Mortgage Debt and Entrepreneurship (October 9, 2015). Bank of England Working Paper No. 560. Available at SSRN: https://ssrn.com/abstract=2674098 or http://dx.doi.org/10.2139/ssrn.2674098

Philippe Bracke (Contact Author)

Bank of England - Structural Economic Analysis Division ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Christian A. L. Hilber

London School of Economics (LSE) - Department of Geography and Environment ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Spatial Economics Research Centre (SERC) ( email )

United Kingdom

Olmo Silva

London School of Economics & Political Science (LSE) - Department of Geography and Environment ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

London School of Economics (LSE) - Centre for Economic Performance

Houghton Street
London WC2A 2AE
United Kingdom

Institute for the Study of Labor (IZA)

Schaumburg-Lippe-Str. 7 / 9
Bonn, D-53072
Germany

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