Do Liquidity Constraints Matter for New Entrepreneurs?

25 Pages Posted: 20 Dec 2004

See all articles by Kevin B. Moore

Kevin B. Moore

Board of Governors of the Federal Reserve System

Date Written: July 25, 2004

Abstract

Numerous studies have found a positive relationship between wealth and entering entrepreneurship, and interpret this as evidence of the existence of liquidity constraints. However, recent research has shown that the relationship between wealth and entering entrepreneurship may be non-linear and only significant for high-wealth households; this result cannot be interpreted as evidence of liquidity constraints. Using data from the SCF, we construct a proxy for wealth based on the household's home equity wealth at the time of the entrepreneurial decision. The results provide further evidence that the relationship between wealth and entering entrepreneurship is only significant for high-wealth households and that liquidity constraints do not appear to bind for the majority of new entrepreneurs. Possible explanations for the relationship between wealth and becoming an entrepreneur include lower risk aversion and differences in the types of businesses started by high-wealth households.

Keywords: Entrepreneurship, wealth, liquidity constraints

JEL Classification: J23, J24, M13

Suggested Citation

Moore, Kevin B., Do Liquidity Constraints Matter for New Entrepreneurs? (July 25, 2004). FEDS Working Paper No. 2004-42. Available at SSRN: https://ssrn.com/abstract=632342 or http://dx.doi.org/10.2139/ssrn.632342

Kevin B. Moore (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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