Entrepreneurship, Liquidity Constraints and Start-up Costs
We study the effects of liquidity constraints and start-up costs on the relationship between wealth and the fraction of entrepreneurs in an economy. We develop a dynamic occupational choice model that yields predictions that can be tested on cross-sectional data with exogenous variation in liquidity constraints (e.g. access to credit) and start-up costs. We use three highly comparable micro datasets (SHARE, ELSA and HRS) focusing on the population age 50+ in 9 countries. These countries have very different levels of start-up costs and potential liquidity constraints. Reduced form results support our theoretical predictions. While higher liquidity constraints yield a steeper wealth profile for the fraction of workers in entrepreneurship, startup costs flatten this relationship by depressing the marginal value of being an entrepreneur as a function of wealth. Countries with high start-up costs such as Italy, Spain and France have flatter wealth gradients.
|Date of creation:||Feb 2007|
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