Liquidity Constraints, Household Wealth and Entrepreneurship

Dartmouth College Working Paper No. 2003

37 Pages Posted: 17 Jul 2003

See all articles by Annamaria Lusardi

Annamaria Lusardi

George Washington University - Department of Accountancy; National Bureau of Economic Research (NBER)

Erik Hurst

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: May 2003

Abstract

Using data from the Panel Study of Income Dynamics (PSID), we show that the propensity to become a business owner in the United States is a non-linear function of wealth. The relationship between wealth and entry into entrepreneurship is essentially flat over the majority of the wealth distribution. It is only at the top of the wealth distribution - after the 95th percentile - that a positive relationship can be found. Segmenting businesses into industries with high and low starting capital requirements, we find no evidence that wealth matters more for businesses requiring higher initial capital. We exploit the regional variation in house prices as an instrument for liquidity. Households who lived in regions where housing prices appreciated strongly were no more likely to start a business than households in other regions. We conclude that, while liquidity constraints may be important for some households, they are not a deterrent to the majority of small business formation in the United States.

Keywords: Business formation, wealthy households, starting capital

JEL Classification: E21, D91

Suggested Citation

Lusardi, Annamaria and Hurst, Erik, Liquidity Constraints, Household Wealth and Entrepreneurship (May 2003). Dartmouth College Working Paper No. 2003. Available at SSRN: https://ssrn.com/abstract=414780 or http://dx.doi.org/10.2139/ssrn.414780

Annamaria Lusardi (Contact Author)

George Washington University - Department of Accountancy ( email )

George Washington University School of Business
Washington, DC 20052
United States

HOME PAGE: http://business.gwu.edu/profiles/annamaria-lusardi/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Erik Hurst

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
240
Abstract Views
2,817
rank
125,834
PlumX Metrics