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Household wealth and entrepreneurship: is there a link?

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  • Silvia Magri

    ()
    (Research Department - Banking statistics Bank of Italy)

Abstract

In the absence of correlation between net wealth and entrepreneurial talent or risk aversion, net wealth should have an explanatory power in the decision of becoming entrepreneurs only for households that are financially constrained. Further, the importance of net wealth should be higher for the poorest households. We test these theoretical predictions for the Italian case, using the Survey of Household Income and Wealth. The evidence is that household initial net wealth is relevant in explaining the decision of becoming entrepreneurs and its relevance is decreasing as far as the household net wealth increases. When instrumented, net wealth still explains the occupational choice, with a more important effect for the households in the first two quartiles of net wealth. As expected, net wealth is also more relevant for the households that are totally or partially turned down by a bank when they apply for a loan. The effect of net wealth is also stronger when legal enforcement of the loan contract is worse. Finally, conditional on becoming entrepreneurs, the initial net wealth does not significantly affect the size of the business. In summary, it seems that imperfections in capital markets can induce people to pile up assets in order to facilitate the decision of becoming entrepreneurs. However, conditional on this decision, the entrepreneurs seem to reach the optimal size of the business.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 180.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:180

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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Keywords: entrepreneurship; business start-up; wealth;

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Cited by:
  1. Silvia Magri, 2009. "The financing of small entrepreneurs in Italy," Annals of Finance, Springer, vol. 5(3), pages 397-419, June.
  2. Carlos Carreira & Filipe Silva, 2010. "No Deep Pockets: Some Stylized Empirical Results On Firms' Financial Constraints," Journal of Economic Surveys, Wiley Blackwell, vol. 24(4), pages 731-753, 09.

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