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The Winner’s Curse of Human Capital

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  • Thomas Åstbro

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  • Irwin Bernhardt

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

Suggested Citation

  • Thomas Åstbro & Irwin Bernhardt, 2005. "The Winner’s Curse of Human Capital," Small Business Economics, Springer, vol. 24(1), pages 63-78, February.
  • Handle: RePEc:kap:sbusec:v:24:y:2005:i:1:p:63-78
    DOI: 10.1007/s11187-005-3097-y
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    References listed on IDEAS

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    1. Irwin Bernhardt, 1994. "Comparative Advantage in Self-Employment and Paid Work," Canadian Journal of Economics, Canadian Economics Association, vol. 27(2), pages 273-289, May.
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    11. Evans, David S & Leighton, Linda S, 1989. "Some Empirical Aspects of Entrepreneurship," American Economic Review, American Economic Association, vol. 79(3), pages 519-535, June.
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