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Small-Scale Business Survival and Inheritance: Evidence from Germany

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  • Dorothea Schäfer
  • Oleksandr Talavera

Abstract

In this paper we investigate whether small-scale businesses face financial constraints that affect their survival. We develop a model of moral hazard in which financial constraints arise endogenously. The model predicts that higher private assets relax financial constraints and have a positive effect on the firm's probability of survival. We test this proposition using German Socio-Economic Panel (GSOEP) data, which cover the period 1984-2004. The release from financial constraints is measured by inheritance. The empirical analysis confirms that the entrepreneur has a higher propensity to stay in business when she inherits capital. This effect is particularly strong for entrepreneurs that switch from self-employment into wage employment. These results are consistent with hypothesis that financial frictions have a perceptible impact on bankruptcy among small business firms.

Suggested Citation

  • Dorothea Schäfer & Oleksandr Talavera, 2006. "Small-Scale Business Survival and Inheritance: Evidence from Germany," Discussion Papers of DIW Berlin 636, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp636
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    References listed on IDEAS

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    Cited by:

    1. Peters, Heiko & Schwarz, Peter, 2013. "Bequests and labor supply in Germany," TranState Working Papers 173, University of Bremen, Collaborative Research Center 597: Transformations of the State.

    More about this item

    Keywords

    Entrepreneurship; survival; financial constraints;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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