Schooling, Capital Constraints and Entrepreneurial Performance: The Endogenous Triangle

35 Pages Posted: 26 Sep 2004 Last revised: 30 Oct 2014

See all articles by Simon C. Parker

Simon C. Parker

University of Western Ontario; Durham University - Department of Economics and Finance; IZA Institute of Labor Economics

Mirjam van Praag

University of Amsterdam - Department of Economics; Copenhagen Business School; Tinbergen Institute; IZA Institute of Labor Economics

Date Written: October 1, 2006

Abstract

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

Parker, Simon C. and van Praag, Mirjam, Schooling, Capital Constraints and Entrepreneurial Performance: The Endogenous Triangle (October 1, 2006). Journal of Business and Economic Statistics, Vol. 24, No. 4. Available at SSRN: https://ssrn.com/abstract=595342 or http://dx.doi.org/10.2139/ssrn.595342

Simon C. Parker (Contact Author)

University of Western Ontario ( email )

1151 Richmond Street
Suite 2
London, Ontario N6A 5B8
Canada

Durham University - Department of Economics and Finance ( email )

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Durham DH1 3HY
United Kingdom
+44 191 3747271 (Phone)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Mirjam Van Praag

University of Amsterdam - Department of Economics ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 525 4096 (Phone)
+31 20 525 4182 (Fax)

Copenhagen Business School ( email )

Kilevej 14A
Frederiksberg, 2000
Denmark

Tinbergen Institute

Gustav Mahlerlaan
Amsterdam
Netherlands

IZA Institute of Labor Economics

Schaumburg-Lippe-Str. 7 / 9
Bonn, D-53072
Germany

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