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

Financial constraints affect individuals’ decision to become self-employed, suggesting a positive relationship between the propensity to become entrepreneur and personal wealth. Recent evidence confirms this hypothesis, and shows that the importance 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 European and U.S. surveys as well as the World Bank, we investigate the impact of start-up costs on the self-employment—wealth relationship. Results confirm the strong positive relationship between entrepreneurial choice and wealth, as well as the negative effect stemming from an increase in start-up costs. Although there is no strong evidence that wealth in itself played a bigger role during the last global financial crisis, the negative impact of higher start-up costs on wealth proved significant.