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Entrepreneurship, Wealth, Liquidity Constraints and Start-up Costs

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  • Raquel Fonseca
  • Pierre-Carl Michaud
  • Thepthida Sopraseuth

Abstract

The authors study the effects of liquidity constraints and start-up costs on the relationship between wealth and the fraction of entrepreneurs in an economy. They develop a dynamic occupational choice model with endogenous wealth and entry into entrepreneurship. The model predicts that, with liquidity constraints, the probability of entering entrepreneurship is an increasing function of individual wealth while the introduction of start-up costs tends to flatten this relationship. The theoretical predictions can be tested on cross-sectional data with exogenous variation in liquidity constraints (e.g. access to credit) and business start-up costs. They use three highly comparable micro datasets (SHARE, ELSA and HRS) providing harmonized data on wealth and work status in 9 countries that characterized by very different levels of start-up costs and liquidity constraints. Their results support their theoretical predictions. While higher liquidity constraints yield a positive relationship with wealth profile for the fraction of workers in entrepreneurship, start-up costs weaken this relationship by depressing the marginal value of being an entrepreneur as a function of wealth. Countries with high start-up costs such as Italy, Spain and France have flatter wealth gradients.

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Bibliographic Info

Paper provided by RAND Corporation Publications Department in its series Working Papers with number 500.

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Length: 29 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:ran:wpaper:500

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Keywords: entrepreneurship; wealth; liquidity constraints; start-up costs;

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References

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Citations

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Cited by:
  1. Fairlie, Robert W. & Krashinsky, Harry A., 2011. "Liquidity Constraints, Household Wealth, and Entrepreneurship Revisited," Santa Cruz Department of Economics, Working Paper Series qt6hv0m2q6, Department of Economics, UC Santa Cruz.
  2. Gries,Thomas & Naudé, Wim, 2010. "Entrepreneurship and Human Development: A Capability Approach," Working Paper Series wp2010-68, World Institute for Development Economic Research (UNU-WIDER).
  3. Frijters, Paul & Kong, Tao & Meng, Xin, 2011. "Migrant Entrepreneurs and Credit Constraints under Labour Market Discrimination," IZA Discussion Papers 5967, Institute for the Study of Labor (IZA).
  4. Grossmann, Volker & Strulik, Holger, 2008. "Should Continued Family Firms Face Lower Taxes Than Other Estates?," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Leibniz Universität Hannover dp-387, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  5. Vincenzo Quadrini, 2009. "Entrepreneurship in macroeconomics," Annals of Finance, Springer, vol. 5(3), pages 295-311, June.
  6. Naude, Wim, 2008. "Entrepreneurship in Economic Development," Working Paper Series RP2008/20, World Institute for Development Economic Research (UNU-WIDER).
  7. Thomas Gries & Wim Naudé, 2010. "Entrepreneurship and structural economic transformation," Small Business Economics, Springer, vol. 34(1), pages 13-29, January.
  8. Nikolaj Malchow-Møller & James Markusen & Jan Skaksen, 2010. "Labour market institutions, learning and self-employment," Small Business Economics, Springer, vol. 35(1), pages 35-52, July.
  9. Gries, Thomas & Naude, Wim, 2008. "Entrepreneurship and Regional Economic Growth: Towards A General Theory of Start-Ups," Working Paper Series RP2008/70, World Institute for Development Economic Research (UNU-WIDER).
  10. Gries, Thomas & Naude, Wim, 2009. "When to Start a New Firm?: Modelling the Timing of Novice and Serial Entrepreneurs," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  11. Naude, Wim, 2009. "Out with the sleaze, in with the ease: Insufficient for entrepreneurial development?," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).

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