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Entrepreneurship, Bequests, and the Distribution of Wealth

  • Marco Cagetti

    (University of Chicago)

  • Mariacristina deNardi

    (Federal Reserve Bank of Chicago and University of Minnesota)

Entrepreneurs hold a significant fraction of the total wealth in the economy; they are approximately 8% of the population but hold 39% of total net worth. In this paper, we construct and solve numerically a life cycle optimization model with intergenerational transmission of bequests to study the choice of starting an entrepreneurial activity, and its effect on the wealth accumulation of entrepreneurs and on the distribution of wealth in the population. We examine two forces that determine self selection into an entrepreneurial activity: initial wealth and attitudes to risk. Starting a business requires initial funds, and entrepreneurs may have to invest part of their own wealth into the business activity. Some of this initial funds may come from parental transfers and bequests. Entrepreneurial income has higher return, but is riskier than labor income: more risk averse households may decide not to become entrepreneurs, despite the expected gains from such activity. We calibrate our model to the US economy. We find that the possibility of an entrepreneurial activity increases by 50% the fraction of wealth held by the top 1%. We also show that increasing the coefficient of risk aversion significantly decreases the percentage of entrepreneurs, and even in the absence of initial funding requirements, we cannot match the percentage of 8.6% of entrepreneurs. We also study the effects of changes in the initial funding requirements and in the degree of intergenerational altruism.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1226.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1226
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  1. Blanchflower, D.G. & Oswald, A., 1991. "What Makes an Entrepreneur?," Economics Series Working Papers 99125, University of Oxford, Department of Economics.
  2. William M. Gentry & R. Glenn Hubbard, 2000. "Entrepreneurship and Household Saving," NBER Working Papers 7894, National Bureau of Economic Research, Inc.
  3. Storesletten, Kjetil & Telmer, Chris & Yaron, Amir, 2001. "Asset Pricing with Idiosyncratic Risk and Overlapping Generations," CEPR Discussion Papers 3065, C.E.P.R. Discussion Papers.
  4. 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 808-27, August.
  5. Mariacristina De Nardi, 1999. "Wealth inequality, intergenerational links and estate taxation," Working Paper Series WP-99-13, Federal Reserve Bank of Chicago.
  6. John Heaton & Deborah Lucas, 2000. "Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk," Journal of Finance, American Finance Association, vol. 55(3), pages 1163-1198, 06.
  7. F. Thomas Juster & James P. Smith & Frank Stafford, 2004. "The Measurement and Structure of Household Wealth," Labor and Demography 0402009, EconWPA.
  8. Vincenzo Quadrini, 2000. "Entrepreneurship, Saving and Social Mobility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 1-40, January.
  9. Gentry William M. & Hubbard R. Glenn, 2004. "Entrepreneurship and Household Saving," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 4(1), pages 1-57, August.
  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. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-96, March.
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