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African Americans' Pursuit of Self-Employment

  • Lofstrom, Magnus

    ()

    (Public Policy Institute of California)

  • Bates, Timothy

    ()

    (Wayne State University, Detroit)

This study examines causes of black/white gaps in business ownership and self-employment rates by analyzing small-business entry and exit patterns. We proceed by recognizing heterogeneity in business ownership across different industry groups: a classification of firms by human- and financial-capital “intensiveness”, or entry barriers, we find, is useful for explaining racial differences in entrepreneurship. The barriers facing aspiring entrepreneurs seeking entry into low-barrier industries differ substantially from those limiting entry into high-barrier industries. Higher entry and lower exit rates typifying whites, relative to African Americans, are traditionally interpreted as reflections of the greater financial- and human-capital resources possessed by non-minorities. This consensus view, however, is simplistic. While education background is a powerful predictor of self-employment patterns in the low-barrier industries, advanced educational credentials actually predict lower entry: college graduates are less likely to select into low-barrier small business ownership. In the high-barrier fields, in contrast, college-educated individuals are more likely than less educated persons to enter into self employment. Overall, black presence in high-barrier fields is held down by lower net asset holdings and weaker educational credentials of potential and actual entrepreneurs. In the low-barrier industries, where the majority of black-owned businesses operate, net worth levels and educational backgrounds are trumped by the racial characteristic: low black entry and high exit rates are powerfully predicted by one's race.

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File URL: http://ftp.iza.org/dp3156.pdf
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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3156.

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Length: 40 pages
Date of creation: Nov 2007
Date of revision:
Publication status: published in: Small Business Economics, 2013, 40 (1), 73-86
Handle: RePEc:iza:izadps:dp3156
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  1. Robert Fairlie & Alicia Robb, 2005. "Why Are Black-Owned Businesses Less Successful than White-Owned Businesses? The Role of Families, Inheritances, and Business Human Capital," Working Papers 05-06, Center for Economic Studies, U.S. Census Bureau.
  2. Timothy Bates & Robert McGuckin, 1990. "The Characteristics of Business Owners Data Base," Journal of Human Resources, University of Wisconsin Press, vol. 25(4), pages 736-751.
  3. Thomas Dunn & Douglas Holtz-Eakin, 1996. "Financial Capital, Human Capital, and the Transition to Self-Employment:Evidence from Intergenerational Links," NBER Working Papers 5622, National Bureau of Economic Research, Inc.
  4. Bates, Timothy, 1990. "Entrepreneur Human Capital Inputs and Small Business Longevity," The Review of Economics and Statistics, MIT Press, vol. 72(4), pages 551-59, November.
  5. P. Köllinger & M. Minniti, 2006. "Not for Lack of Trying: American Entrepreneurship in Black and White," Small Business Economics, Springer, vol. 27(1), pages 59-79, August.
  6. David G. Blanchflower & Phillip B. Levine & David J. Zimmerman, 2003. "Discrimination in the Small-Business Credit Market," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 930-943, November.
  7. Dunn, Thomas & Holtz-Eakin, Douglas, 2000. "Financial Capital, Human Capital, and the Transition to Self-Employment: Evidence from Intergenerational Links," Journal of Labor Economics, University of Chicago Press, vol. 18(2), pages 282-305, April.
  8. Timothy Bates & William D. Bradford, 2008. "Venture-Capital Investment in Minority Business," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(2-3), pages 489-504, 03.
  9. Bates, Timothy, 1995. "Self-employment entry across industry groups," Journal of Business Venturing, Elsevier, vol. 10(2), pages 143-156, March.
  10. Ken Cavalluzzo & John Wolken, 2005. "Small Business Loan Turndowns, Personal Wealth, and Discrimination," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2153-2178, November.
  11. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  12. Erik Hurst & Annamaria Lusardi, 2004. "Liquidity Constraints, Household Wealth, and Entrepreneurship," Journal of Political Economy, University of Chicago Press, vol. 112(2), pages 319-347, April.
  13. 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.
  14. Borjas, George J & Bronars, Stephen G, 1989. "Consumer Discrimination and Self-employment," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 581-605, June.
  15. Michael Hout & Harvey S. Rosen, 1999. "Self-Employment, Family Background, and Race," NBER Working Papers 7344, National Bureau of Economic Research, Inc.
  16. Bruce D. Meyer, 1990. "Why Are There So Few Black Entrepreneurs?," NBER Working Papers 3537, National Bureau of Economic Research, Inc.
  17. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  18. Fairlie, Robert W, 1999. "The Absence of the African-American Owned Business: An Analysis of the Dynamics of Self-Employment," Journal of Labor Economics, University of Chicago Press, vol. 17(1), pages 80-108, January.
  19. Paul D. Reynolds & Nancy M. Carter & William B. Gartner & Patricia G. Greene, 2004. "The Prevalence of Nascent Entrepreneurs in the United States: Evidence from the Panel Study of Entrepreneurial Dynamics," Small Business Economics, Springer, vol. 23(4), pages 263-284, November.
  20. William D. Bradford, 2003. "The Wealth Dynamics of Entrepreneurship for Black and White Families in the U.S," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 49(1), pages 89-116, 03.
  21. Evans, David S & Leighton, Linda S, 1989. "Some Empirical Aspects of Entrepreneurship," American Economic Review, American Economic Association, vol. 79(3), pages 519-35, June.
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