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Entrepreneurial Decisions and Liquidity Constraints

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  • Holtz-Eakin, D.
  • Joulfaian, D.
  • Rosen, H.S.

Abstract

This paper analyzes the role of liquidity constraints in the formation of new entrepreneurial enterprises. The basic empirical strategy is to determine whether an individual's wealth affects the probability of becoming an entrepreneur, and the conditional amounts of depreciable assets, ceteris paribus. If so, liquidity constraints are likely to be present. To be successful, such a research strategy requires a measure of asset variation that is both precisely measured and exogenous to the entrepreneurial decision. Our data are uniquely well-suited for this purpose. The sample consists of the 1981 and 1985 federal income tax returns of a group of people who received inheritances in 1982 and 1983, along with information on the size of those inheritances from a matched set of estate tax returns. Hence, we can examine how the exogenous receipt of capital affects the decision to become an entrepreneur and important financial characteristics of new enterprises. Our results suggest that the size of the inheritance has a substantial effect on the probability of becoming an entrepreneur, and that conditional on becoming an entrepreneur, the size of the inheritance has a statistically significant and quantitatively important effect on the amount of capital employed. These findings are consistent with the presence of liquidity constraints.
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Suggested Citation

  • Holtz-Eakin, D. & Joulfaian, D. & Rosen, H.S., 1992. "Entrepreneurial Decisions and Liquidity Constraints," Papers 129, Princeton, Department of Economics - Financial Research Center.
  • Handle: RePEc:fth:prinec:129
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    References listed on IDEAS

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    1. Blanchflower, D. & Oswald, A., 1990. "What Makes A Young Entrepreneur?," Papers 373, London School of Economics - Centre for Labour Economics.
    2. Victor R. Fuchs, 1982. "Self-Employment and Labor Force Participation of Older Males," Journal of Human Resources, University of Wisconsin Press, vol. 17(3), pages 339-357.
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    5. William G. Gale & John Karl Scholz, 1994. "Intergenerational Transfers and the Accumulation of Wealth," Journal of Economic Perspectives, American Economic Association, vol. 8(4), pages 145-160, Fall.
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    8. James M. Poterba, 1989. "Venture Capital and Capital Gains Taxation," NBER Chapters, in: Tax Policy and the Economy, Volume 3, pages 47-68, National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    entrepreneurs ; economic models ; financement;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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