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The Winner's Curse of Human Capital

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  • Thomas Astebro
  • Irwin Bernhardt

Abstract

We extend a model developed by Evans) 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. Empirical analysis reveals that entrepreneurs with greater levels of human capital and entrepreneurial abilities have both greater financial wealth and greater levels of start-up capital pointing to the endogenous nature of credit constraints. Start-ups are generally financially constrained when measured by the impact on start-up capital of predicted household income. Greater levels of human capital relaxes financial constraints, apparently due to greater productivity of human capital in wage work than in self-employment. Paradoxically, then, 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.

Suggested Citation

  • Thomas Astebro & Irwin Bernhardt, 1999. "The Winner's Curse of Human Capital," Working Papers 99-5, Center for Economic Studies, U.S. Census Bureau.
    • Handle: RePEc:cen:wpaper:99-5
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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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