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Small-Scale Business Survival and Inheritance: Evidence from Germany

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Author Info
Dorothea Schäfer
Oleksandr Talavera

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Abstract

In this paper we investigate whether small-scale businesses face financial constraints that affect their survival. We develop a model of moral hazard in which financial constraints arise endogenously. The model predicts that higher private assets relax financial constraints and have a positive effect on the firm's probability of survival. We test this proposition using German Socio-Economic Panel (GSOEP) data, which cover the period 1984-2004. The release from financial constraints is measured by inheritance. The empirical analysis confirms that the entrepreneur has a higher propensity to stay in business when she inherits capital. This effect is particularly strong for entrepreneurs that switch from self-employment into wage employment. These results are consistent with hypothesis that financial frictions have a perceptible impact on bankruptcy among small business firms.

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Publisher Info
Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 636.

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Length: 28 p.
Date of creation: 2006
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Publication status: Published in: Small Business Economics (2009), 95-109
Handle: RePEc:diw:diwwpp:dp636

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Related research
Keywords: Entrepreneurship; survival; financial constraints;

Find related papers by JEL classification:
G30 - Financial Economics - - Corporate Finance and Governance - - - General
J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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  2. van Praag, C Mirjam, 2003. " Business Survival and Success of Young Small Business Owners," Small Business Economics, Springer, vol. 21(1), pages 1-17, August. [Downloadable!] (restricted)
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  9. Lechner, Michael, 1999. "Earnings and Employment Effects of Continuous Off-the-Job Training in East Germany after Unification," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(1), pages 74-90, January.
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  11. Douglas Holtz-Eakin & Harvey S. Rosen, 2005. "Cash Constraints and Business Start-Ups: Deutschmarks Versus Dollars," The B.E. Journal of Economic Analysis & Policy, Berkeley Electronic Press, vol. 0(1). [Downloadable!]
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  14. Manove, Michael & Padilla, A Jorge & Pagano, Marco, 2001. "Collateral versus Project Screening: A Model of Lazy Banks," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 726-44, Winter.
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