Mortgage Debt and Entrepreneurship
54 Pages Posted: 14 Oct 2015 Last revised: 17 Oct 2015
Date Written: October 9, 2015
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: Suggested Citation