Wealth, Industry and the Transition to Entrepreneurship
AbstractAlthough the debate about the effect of wealth on entrepreneurship is now almost two decades old, there is little consensus among researchers about the significance of wealth as a determinant for self-employment. We re-visit the relationship between wealth and entrepreneurship using data from the National Longitudinal Survey of Youth. Like Hurst and Lusardi (2004), our results suggest the relationship between wealth and the probability of entering entrepreneurship is nonlinear. However, unlike Hurst and Lusardi, we find the probability of entrepreneurship increases at an increasing rate with wealth, starting at lower quantiles of the wealth distribution. We also observe that the aggregate relationship masks differences among entrepreneurs with respect to their industry. While high capital requirement industries and professional services display a convex relationship between wealth and the probability of self-employment, low capital requirement industries display a concave relationship. Since we find a positive relationship between wealth and the probability of entering entrepreneurship at lower quantiles of the wealth distribution, it is critical to check whether this relationship is caused by wealth endogeneity. In order to account for the possible endogeneity of wealth we instrument for wealth using changes in housing equity and the value of unexpected inheritances. The results of instrumental variable estimation reveal that there is no significant relationship between wealth and entering entrepreneurship for the full sample as well as for each of the three industries.
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Bibliographic InfoPaper provided by Fordham University, Department of Economics in its series Fordham Economics Discussion Paper Series with number dp2008-09.
Date of creation: 2008
Date of revision:
Entrepreneur; wealth; industry; liquidity constraints;
Find related papers by JEL classification:
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-06-13 (All new papers)
- NEP-EDU-2008-06-13 (Education)
- NEP-ENT-2008-06-13 (Entrepreneurship)
- NEP-HRM-2008-06-13 (Human Capital & Human Resource Management)
- NEP-LAB-2008-06-13 (Labour Economics)
- NEP-MAC-2008-06-13 (Macroeconomics)
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