Schooling, Capital Constraints and Entrepreneurial Performance: The Endogenous Triangle
35 Pages Posted: 26 Sep 2004 Last revised: 30 Oct 2014
Date Written: October 1, 2006
To what extent is the performance of a small business venture, once started, affected by capital constraints at the time of inception and by the business founder's investment in human capital? We attempt to answer this question taking into account the potential endogeneity of human and financial capital, and also possible interdependence between these variables. A theoretical model is developed which generates predictions about the nature and directions of the interdependencies. Using a rich data set on Dutch entrepreneurs in 1995, we obtain findings that are broadly consistent with the theoretical model. Instrumental variable estimates indicate that a 1 percentage point relaxation of capital constraints increases entrepreneurs' gross business incomes by 2 per cent on average. Also, education enhances entrepreneurs' performance both directly - with a rate of return of 12.7 per cent - and indirectly, because each extra year of schooling decreases capital constraints by 1.18 percentage points. The indirect effect of education on entrepreneurs' performance is estimated to be between 0.8 and 2.4 per cent.
Keywords: Entrepreneurship, self-employment, returns to education, capital constraint, liquidity constraint, borrowing constraint
JEL Classification: J23, J24, J31, M13
Suggested Citation: Suggested Citation