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Entrepreneurial Decisions and Liquidity Constraints

Author

Listed:
  • Douglas Holtz-Eakin

    (Syracuse University)

  • David Joulfaian

    (U.S. Department of the Treasury)

  • Harvey S. Rosen

    (Princeton University)

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 and interest deductions, 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 l985 federal tax returns of a group of people who received inheritances in 1982 and l983, 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 little effect on the probability of becoming an entrepreneur, but 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. The conditional elasticity is 0.45. Thus, liquidity constraints matter, but not in the fashion suggested in some earlier investigations.

Suggested Citation

  • Douglas Holtz-Eakin & David Joulfaian & Harvey S. Rosen, 1992. "Entrepreneurial Decisions and Liquidity Constraints," Working Papers 679, Princeton University, Department of Economics, Industrial Relations Section..
  • Handle: RePEc:pri:indrel:299
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    References listed on IDEAS

    as
    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.
    3. 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 808-827, August.
    4. Francine D. Blau & John W. Graham, 1990. "Black-White Differences in Wealth and Asset Composition," The Quarterly Journal of Economics, Oxford University Press, vol. 105(2), pages 321-339.
    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.
    6. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    7. Evans, David S & Leighton, Linda S, 1989. "Some Empirical Aspects of Entrepreneurship," American Economic Review, American Economic Association, vol. 79(3), pages 519-535, June.
    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.
    9. Bernard F. Lentz & David N. Laband, 1990. "Entrepreneurial Success and Occupational Inheritance among Proprietors," Canadian Journal of Economics, Canadian Economics Association, vol. 23(3), pages 563-579, August.
    10. 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.
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    More about this item

    Keywords

    entrepreneur; liquidity constraint; new business;

    JEL classification:

    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies

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