Housing Collateral and Entrepreneurship

This paper shows that collateral constraints restrict firm entry and post-entry growth, even in the long-run. We use French administrative data and exploit cross-sectional variation in local house-price appreciation as shocks to the value of collateral available to homeowners. We control for local demand shocks by comparing homeowners to two control groups that live in the same region but do not experience collateral shocks: (i) renters and (ii) homeowners with a mortgage outstanding, who - in France - cannot take out a second mortgage on their house. In both comparisons, we find that an increase in collateral value leads to a higher probability of becoming an entrepreneur. Conditional on entry, entrepreneurs with access to more valuable collateral use more debt, start larger firms, and remain significantly larger even six years after creation.