Self-Employment, Wealth and Start-up Costs: Evidence from a Financial Crisis

Financial constraints affect in important ways the decision of individuals to become entrepreneur (self-employed). This implicitly suggests a positive relation between the propensity of individuals to become entrepreneur and their personal wealth. Recent theoretical work and empirical evidence confirm this hypothesis. More interestingly, it has been shown that the slope of the entrepreneurship-wealth relationship increases with the extent of liquidity constraints and flattens with the magnitude of start-up costs. Using individual level data from 3 surveys (SHARE, ELSA and HRS) in Europe and the United States, as well as the World Bank’s Doing Business data, this paper empirically zeroes in on the impact of start-up costs on the self-employment-wealth relationship. The dynamic nature of the data enables us to investigate potential effects of the last global financial crisis. Results confirm the strong positive relationship between the entrepreneurial choice and wealth, as well as the negative effect stemming from the increase in start-up costs. Interestingly, although there is no strong evidence that wealth in itself played a bigger role during the crisis, we find that the negative impact of start-up costs on wealth proved to be significantly pronounced during the last crisis.