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Liquidity Constraints, Household Wealth, and Entrepreneurship

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Listed author(s):
  • Erik Hurst
  • Annamaria Lusardi

Abstract

The propensity to become a business owner is a nonlinear function of wealth. The relationship between wealth and entry into entrepreneurship is essentially flat over the majority of the wealth distribution. It is only at the top of the wealth distributionafter the ninety-fifth percentilethat a positive relationship can be found. Segmenting businesses into industries with high and lowstarting capital requirements, we find no evidence that wealth matters more for businesses requiring higher initial capital. When using inheritances as an instrument for wealth, we find that both past and future inheritances predict current business entry, showing that inheritances capture more than simply liquidity. We further exploit the regional variation in house prices and find that households that lived in regions in which housing prices appreciated strongly were no more likely to start a business than households in other regions.

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File URL: http://dx.doi.org/10.1086/381478
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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 112 (2004)
Issue (Month): 2 (April)
Pages: 319-347

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Handle: RePEc:ucp:jpolec:v:112:y:2004:i:2:p:319-347
Contact details of provider: Web page: http://www.journals.uchicago.edu/JPE/

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  1. 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.
  2. Joseph G. Altonji & Thomas A. Dunn, 2000. "An Intergenerational Model of Wages, Hours, and Earnings," Journal of Human Resources, University of Wisconsin Press, vol. 35(2), pages 221-258.
  3. 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 808-827, August.
  4. Engelhardt, Gary V., 1996. "House prices and home owner saving behavior," Regional Science and Urban Economics, Elsevier, vol. 26(3-4), pages 313-336, June.
  5. Juster, F. Thomas & Smith, James P. & Stafford, Frank, 1999. "The measurement and structure of household wealth," Labour Economics, Elsevier, vol. 6(2), pages 253-275, June.
  6. Tobias J. Moskowitz & Annette Vissing-Jørgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," American Economic Review, American Economic Association, vol. 92(4), pages 745-778, September.
  7. Kerwin Kofi Charles & Erik Hurst, 2003. "The Correlation of Wealth across Generations," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1155-1182, December.
  8. Fairlie, Robert W, 1999. "The Absence of the African-American Owned Business: An Analysis of the Dynamics of Self-Employment," Journal of Labor Economics, University of Chicago Press, vol. 17(1), pages 80-108, January.
  9. Tobias J. Moskowitz & Annette Vissing-Jorgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," NBER Working Papers 8876, National Bureau of Economic Research, Inc.
  10. Quadrini, Vincenzo, 1999. "The Importance of Entrepreneurship for Wealth Concentration and Mobility," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 45(1), pages 1-19, March.
  11. Bruce D. Meyer, 1990. "Why Are There So Few Black Entrepreneurs?," NBER Working Papers 3537, National Bureau of Economic Research, Inc.
  12. 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.
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