Entrepreneurial Decisions and Liquidity Constraints

30 Pages Posted: 22 Aug 2007

See all articles by Douglas Holtz-Eakin

Douglas Holtz-Eakin

Syracuse University; National Bureau of Economic Research (NBER)

David Joulfaian

U.S. Department of the Treasury, Office of Tax Analysis (OTA); Georgetown University - Department of Economics

Harvey S. Rosen

Princeton University - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: November 1993

Abstract

This paper analyzes the role of liquidity constraints in the formation of new entrepreneurial enterprises. The basic empirical strategy is to determine whether an individual's wealth affects the probability of becoming an entrepreneur, and the conditional amounts of depreciable assets, ceteris paribus. If so, liquidity constraints are likely to be present. To be successful, such a research strategy requires a measure of asset variation that is both precisely measured and exogenous to the entrepreneurial decision. Our data are uniquely well-suited for this purpose. The sample consists of the 1981 and 1985 federal income tax returns of a group of people who received inheritances in 1982 and 1983, along with information on the size of those inheritances from a matched set of estate tax returns. Hence, we can examine how the exogenous receipt of capital affects the decision to become an entrepreneur and important financial characteristics of new enterprises. Our results suggest that the size of the inheritance has a substantial effect on the probability of becoming an entrepreneur, and that conditional on becoming an entrepreneur, the size of the inheritance has a statistically significant and quantitatively important effect on the amount of capital employed. These findings are consistent with the presence of liquidity constraints.

Suggested Citation

Holtz-Eakin, Douglas and Joulfaian, David and Rosen, Harvey S., Entrepreneurial Decisions and Liquidity Constraints (November 1993). NBER Working Paper No. w4526. Available at SSRN: https://ssrn.com/abstract=480270

Douglas Holtz-Eakin (Contact Author)

Syracuse University ( email )

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National Bureau of Economic Research (NBER)

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David Joulfaian

U.S. Department of the Treasury, Office of Tax Analysis (OTA) ( email )

1500 Pennsylvania Ave. NW
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Georgetown University - Department of Economics ( email )

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Harvey S. Rosen

Princeton University - Department of Economics ( email )

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Princeton, NJ 08544
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

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