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Mortgage debt and entrepreneurship

Author

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  • Philippe Bracke

    (Bank of England)

  • Christian Hilber

    (Bank of England)

  • Olmo Silva

    (Bank of England)

Abstract

We study the link between mortgage debt and entrepreneurship using a model of occupational choice and housing tenure in a setting where homeowners do not default on their debt. Our model predicts that, as long as the mortgage interest rate exceeds the rate of interest on liquid wealth: (i) mortgage debt, by amplifying risk aversion, diminishes the likelihood of entrepreneurship; and (ii) the negative relation between leverage and entrepreneurship increases with income volatility. Our model also shows that the link between housing wealth and entrepreneurship is ambiguously signed because of competing portfolio and hedging effects. Using the British Household Panel Survey, we test and confirm the model’s predictions. A one standard deviation increase in leverage reduces the probability of entrepreneurship by 10%–12%.

Suggested Citation

  • Philippe Bracke & Christian Hilber & Olmo Silva, 2015. "Mortgage debt and entrepreneurship," Bank of England working papers 560, Bank of England.
    • Handle: RePEc:boe:boeewp:0560
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    More about this item

    Keywords

    Entrepreneurship; mortgage debt; leverage; risk aversion;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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