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Liquidity Constraints, Household Wealth, and Entrepreneurship

Posted: 8 Mar 2004  

Erik Hurst

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

Annamaria Lusardi

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

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Abstract

The propensity to become a business owner is a nonlinear 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 ninety-fifth 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. When using inheritances as an instrument for wealth, we find that both past and future inheritances predict current business entry, showing that inheritances capture more than simply liquidity. We further exploit the regional variation in house prices and find that households that lived in regions in which housing prices appreciated strongly were no more likely to start a business than households in other regions.

Suggested Citation

Hurst, Erik and Lusardi, Annamaria, Liquidity Constraints, Household Wealth, and Entrepreneurship. Journal of Political Economy, Vol. 112, pp. 319-47, April 2004. Available at SSRN: https://ssrn.com/abstract=515086

Erik Hurst (Contact Author)

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

Annamaria Lusardi

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

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