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The Winner’s Curse of Human Capital

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  • Thomas Åstbro

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  • Irwin Bernhardt
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    Abstract

    We extend a model developed by Evans and Jovanovic (1989) to explain when start-ups are credit constrained. We show that the magnitude of the credit constraint is conditioned by the relative productivity of human capital in both wage work and self-employment. The effect of predicted household income on start-up capital is used to indicate the existence of financial constraint. Empirical analysis reveals that entrepreneurs with high human capital have both greater financial wealth and greater levels of start-up capital pointing to the endogenous nature of credit constraints. High human capital relaxes financial constraints, apparently due to greater productivity of human capital in wage work than in self-employment. Those who are the least likely to be credit constrained in self-employment are those that are least likely to switch into self-employment,and vice versa. Copyright Springer Science + Business Media, Inc. 2005

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    File URL: http://hdl.handle.net/10.1007/s11187-005-3097-y
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    Article provided by Springer in its journal Small Business Economics.

    Volume (Year): 24 (2005)
    Issue (Month): 1 (February)
    Pages: 63-78

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    Handle: RePEc:kap:sbusec:v:24:y:2005:i:1:p:63-78
    Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=100338

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    1. Douglas Holtz-Eakin & David Joulfaian & Harvey S. Rosen, 1993. "Sticking it Out: Entrepreneurial Survival and Liquidity Constraints," NBER Working Papers 4494, National Bureau of Economic Research, Inc.
    2. Douglas Holtz-Eakin & David Joulfaian & Harvey S. Rosen, 1994. "Entrepreneurial Decisions and Liquidity Constraints," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 334-347, Summer.
    3. Evans, David S & Leighton, Linda S, 1989. "Some Empirical Aspects of Entrepreneurship," American Economic Review, American Economic Association, vol. 79(3), pages 519-35, June.
    4. Blanchflower, D. & Oswald, A., 1990. "What Makes A Young Entrepreneur?," Papers 373, London School of Economics - Centre for Labour Economics.
    5. Timothy Bates & Caren Grown, 1991. "Commercial Bank Lending Practices And The Development Of Black-Owned Construction Companies," Working Papers 91-9, Center for Economic Studies, U.S. Census Bureau.
    6. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    7. Wolken, John D., 1998. ""New" data sources for research on small business finance," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 1067-1076, August.
    8. Cressy, Robert, 1996. "Are Business Startups Debt-Rationed?," Economic Journal, Royal Economic Society, vol. 106(438), pages 1253-70, September.
    9. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August.
    10. De Meza, D. & Southey, C., 1995. "The Borrower's Curse: Optimism, Finance and Enterpreneurship," Discussion Papers 9502, Exeter University, Department of Economics.
    11. Barton H. Hamilton, 2000. "Does Entrepreneurship Pay? An Empirical Analysis of the Returns to Self-Employment," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 604-631, June.
    12. Irwin Bernhardt, 1994. "Comparative Advantage in Self-Employment and Paid Work," Canadian Journal of Economics, Canadian Economics Association, vol. 27(2), pages 273-89, May.
    13. Bates, Timothy, 1990. "Entrepreneur Human Capital Inputs and Small Business Longevity," The Review of Economics and Statistics, MIT Press, vol. 72(4), pages 551-59, November.
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    Cited by:

    1. Fairlie, Robert W & Robb, Alicia M., 2005. "Why Are Black-Owned Businesses Less Successful than White-Owned Businesses? The Role of Families, Inheritances, and Business Human Capital," Santa Cruz Department of Economics, Working Paper Series qt5gk2188g, Department of Economics, UC Santa Cruz.
    2. Alex Coad & Julian Frankish & Paul Nightingale & Richard Roberts, 2014. "Business experience and start-up size: Buying more lottery tickets next time around?," Small Business Economics, Springer, vol. 43(3), pages 529-547, October.
    3. Tristan Boyer & Régis Blazy, 2014. "Born to be alive? The survival of innovative and non-innovative French micro-start-ups," Small Business Economics, Springer, vol. 42(4), pages 669-683, April.
    4. Curtiss, Jarmila, 2012. "Determinants of Financial Capital Use: Review of theories and implications for rural businesses," Working Papers 122846, Factor Markets, Centre for European Policy Studies.
    5. Seyit Cilasun & Burak Günalp, 2012. "An Empirical Analysis of the Average Plant Start-Up Size in Turkish Manufacturing Industries," Review of Industrial Organization, Springer, vol. 40(4), pages 273-289, June.
    6. Simon Parker, 2014. "Who become serial and portfolio entrepreneurs?," Small Business Economics, Springer, vol. 43(4), pages 887-898, December.
    7. Klaesson , Johan & Karlsson, Charlie, 2014. "Market potential, start-up size and the survival of new firms," Working Paper Series in Economics and Institutions of Innovation 384, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
    8. Yuji Honjo & Masatoshi Kato & Hiroyuki Okamuro, 2014. "R&D investment of start-up firms: does founders’ human capital matter?," Small Business Economics, Springer, vol. 42(2), pages 207-220, February.
    9. Barbara ERMINI, 2008. "Oltre Gibrat. Capitale umano dei fondatori, endogeneita' del finanziamento pubblico e crescita delle giovani imprese hi-tech italiane," Working Papers 322, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.

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